The capital gains tax on gifted property is calculated by subtracting the donor’s original cost basis from your sale price, not the value of the property on the day you received it. That single rule drives everything else: all the appreciation that built up while the donor owned the asset becomes your taxable gain when you sell. If your mother bought stock for $10,000 twenty years ago and gave it to you when it was worth $80,000, selling at $80,000 produces a $70,000 taxable gain, even though the stock hadn’t moved a penny since it hit your account.
Carryover Basis Is the Starting Point
Under Section 1015 of the Internal Revenue Code, your basis in gifted property is the same as the donor’s adjusted basis immediately before the gift.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust This is called carryover basis, and it exists so that appreciation during the donor’s ownership doesn’t slip out of the tax system just because the property changed hands.
To calculate your gain, you need three facts about the gift: the donor’s adjusted basis just before the transfer, the fair market value on the date of the gift, and any federal gift tax the donor paid.2Internal Revenue Service. Publication 551 – Basis of Assets The burden of proving your basis falls on you. If you can’t document what the donor originally paid, the IRS may treat your entire sale price as taxable gain.
When the Gift Had Already Lost Value
The carryover rule has an exception for property that was worth less than the donor’s basis at the time of the gift. In that case, you have two different bases, and which one you use depends on whether you sell for a gain or a loss.3Internal Revenue Service. Frequently Asked Questions on Property Basis
- To calculate a gain, use the donor’s adjusted basis.
- To calculate a loss, use the fair market value at the time of the gift, if that’s lower than the donor’s basis.
Say your aunt bought stock for $10,000 and gave it to you when it was worth $6,000. Sell for $5,000 and your deductible loss is $1,000, measured from the $6,000 gift-date value, not the $10,000 original cost.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust The $4,000 that evaporated while your aunt held the asset disappears from the tax system entirely. The rule exists to stop people from shifting losses to relatives who could use the deduction.
The No-Gain, No-Loss Zone
The dual basis rule creates a strange middle range. If your sale price lands between the fair market value at the gift date and the donor’s higher basis, you report neither a gain nor a loss. The Treasury Regulation illustrates this with a donor basis of $100,000, a gift-date value of $90,000, and a sale price of $95,000. No gain, because the sale price is below the $100,000 gain basis. No loss, because the sale price is above the $90,000 loss basis. You still report the transaction, but the gain or loss is zero.4eCFR. 26 CFR 1.1015-1 – Basis of Property Acquired by Gift After December 31, 1920
Adjustments That Lower Your Taxable Gain
Gift Tax Paid by the Donor
If the donor paid federal gift tax on the transfer, you can add part of that tax to your basis. The formula is the gift tax paid multiplied by a fraction: net appreciation (fair market value minus donor’s basis) over the taxable value of the gift after the annual exclusion.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust The adjustment can’t push your basis above the fair market value at the time of the gift.2Internal Revenue Service. Publication 551 – Basis of Assets In practice this only comes up on very large gifts, since the donor must have actually owed gift tax after exceeding the lifetime exemption.
Capital Improvements
Substantial improvements you make to gifted property after receiving it increase your adjusted basis. Adding a room, replacing a roof, or installing new heating counts. Routine maintenance and cosmetic repairs don’t. A house received with a $150,000 carryover basis, plus $40,000 for a qualifying renovation, gives you an adjusted basis of $190,000.
Holding Period and Rate
Whether your gain gets the lower long-term rate depends on how long the property was held, and gifted property has a favorable rule here. When the carryover basis applies, you tack on the donor’s holding period.5Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property If the donor held the property for fifteen years, you could sell it the day after receiving it and still qualify for long-term treatment.
The exception: when the dual basis rule forces you to use the fair market value as your basis for a loss, your holding period restarts on the gift date. Sell at a loss within a year and the loss is short-term.
Long-term capital gains are taxed at 0%, 15%, or 20% depending on income; short-term gains are taxed as ordinary income.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses For 2026, single filers pay 0% on long-term gains up to $49,450 of taxable income, 15% between $49,450 and $545,500, and 20% above that. Married couples filing jointly hit 15% at $98,900 and 20% at $613,700.
Two extras catch people out:
- Gains on collectibles such as art, coins, antiques, and precious metals are taxed at a maximum 28% rate, not the usual 20% ceiling.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses
- A 3.8% Net Investment Income Tax surtax applies to capital gains once your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). These thresholds are not indexed for inflation and have not changed since 2013.7Internal Revenue Service. Net Investment Income Tax
A high-income seller of a gifted asset could face a combined federal rate of 23.8%, or 31.8% on collectibles. Many states also tax capital gains, with rates roughly between 1% and over 13%.
If the Sale Produces a Loss
A capital loss from gifted property offsets other capital gains dollar for dollar. Beyond that, you can deduct up to $3,000 of net capital losses against ordinary income each year, or $1,500 if married filing separately. Anything unused carries forward indefinitely.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses A large loss from a gifted asset sold under the dual basis rule can take years to use up.
Gifted Homes and the Primary Residence Exclusion
If you receive a home as a gift and live in it as your primary residence, you may qualify for the Section 121 exclusion when you sell. This exempts up to $250,000 of gain, or $500,000 for married couples filing jointly.8Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
You must have owned and used the home as your principal residence for at least two of the five years before the sale. The 24 months don’t have to be continuous. Because you tack on the donor’s holding period for ownership, the ownership test can be met quickly. The use test runs on your own clock: you personally need to have lived there for two years.
The math can be dramatic. If a parent bought a home for $100,000, gifted it to you when it was worth $500,000, and you lived in it for two years before selling at $550,000, your gain is $450,000. A single filer excludes $250,000, leaving $200,000 taxable. Without the exclusion, the full $450,000 would be on the table.
Why a Gift Is Worse Than an Inheritance for Tax Purposes
Inherited property gets a stepped-up basis to the fair market value at the date of death under Section 1014. All the appreciation that built up during the deceased person’s life is wiped clean for capital gains purposes. A gift preserves that appreciation and passes the tax to you.
Same numbers, different outcome: a parent’s stock with a $10,000 basis, now worth $80,000. Inherit it, and you have an $80,000 basis and no gain on an immediate sale. Receive it as a gift, and you have a $10,000 basis and a $70,000 taxable gain on the same sale. This is why advisors often suggest that elderly owners of highly appreciated assets hold them rather than gift them during their lifetime.
Documentation You Need From the Donor
Because the IRS puts the burden of proving basis on you, gather records at the time of the gift, not years later when you sell. You need the donor’s adjusted basis, the fair market value on the gift date, and whether the donor paid gift tax.2Internal Revenue Service. Publication 551 – Basis of Assets
For stock, that means the original purchase price, purchase date, and any reinvested dividends or splits that adjusted the basis. For real estate, the original purchase price plus records of capital improvements the donor made. A professional appraisal at the time of the gift is worth the cost for high-value property, especially real estate where the dual basis rule may apply later.
If the donor filed Form 709 (the gift tax return), that return typically documents both the fair market value at the time of the gift and the donor’s adjusted basis. Ask for a copy. Without documentation, you risk treating the entire sale price as gain, which is entirely avoidable with a little planning.
How to Report the Sale
You report the sale on Form 8949 and carry the totals to Schedule D of your Form 1040.9Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets You need the date the donor originally acquired the property (for the holding period), your sale date, the sale price, and your adjusted basis. In the no-gain-no-loss zone, report the sale and enter zero.
Watch the 1099-B. Your broker or closing agent will often report a cost basis that doesn’t match your carryover basis, because they only know what the asset was worth when it moved into your account. Correct the reported basis on Form 8949 in column (g). Missing this adjustment is one of the most common mistakes on gifted-property sales and will almost certainly draw an IRS notice.