Which statement is true regarding the depreciation recapture potential when property is gifted?

When property is gifted, the depreciation recapture potential is transferred to the recipient of the gift. This means that if the recipient later sells the property, they must account for any depreciation that was previously claimed on that property by the donor.

This concept is rooted in the idea that gifts of property retain their tax characteristics. The recipient steps into the shoes of the donor with respect to the property's adjusted basis and any depreciation recapture potential associated with it. Therefore, when the recipient ultimately disposes of the property, they may have to recognize the depreciation recapture as income to the extent that the property has been depreciated beyond its adjusted basis.

Understanding this transfer of potential helps delineate the tax implications for both the donor and recipient regarding future sales, and underscores the importance of recognizing those past depreciation claims on gifted property. This highlights the continuity of tax attributes in transactions involving gifted property, ensuring that both parties are aware of the potential tax consequences moving forward.