Part Sale, Part Gift: Income Tax, Gift Tax, and Basis

When you sell property to a family member for less than it’s worth, the IRS applies part-sale, part-gift tax rules: the amount the buyer pays is treated as a sale that can produce capital gain, and the discount below fair market value is treated as a gift. For 2026, the annual gift tax exclusion is $19,000 per recipient and the lifetime exemption is $15,000,000 after Congress raised it through the One, Big, Beautiful Bill signed in July 2025.¹ Two things surprise most families: you cannot claim a loss even if the sale price is below your basis, and the recipient ends up with two different basis figures depending on whether they later sell at a gain or a loss.

How the Transaction Splits

The math is simple. The sale portion equals whatever the buyer actually pays. The gift portion equals the property’s fair market value minus that payment. Fair market value is the price the property would fetch between a willing buyer and a willing seller, neither under pressure and both reasonably informed.

Getting that value right is the linchpin of everything else. If the IRS later concludes the property was worth more than you claimed, both the income tax gain and the gift tax exposure grow. For real estate and other high-value assets, a professional appraisal completed before the transfer closes is the standard protection if the valuation is ever questioned.

Income Tax on the Sale Portion

The transferor’s income tax calculation uses a rule that applies only to part-sale, part-gift transfers. You compare the amount you received against your entire adjusted basis in the property. If the sale price exceeds your basis, the difference is a taxable capital gain.²

If the sale price is below your basis, you might expect to claim a loss. You cannot. The regulation flatly disallows a loss on any transfer that is partly a gift. The reasoning: you chose to sell below market, so the shortfall reflects generosity, not an economic loss.²

A quick example. A parent owns rental property with a fair market value of $400,000 and an adjusted basis of $150,000, and sells it to their adult child for $250,000. The gift portion is $150,000 ($400,000 minus $250,000). The taxable gain is $100,000 ($250,000 minus $150,000). If the parent’s basis had instead been $300,000, the resulting $50,000 shortfall would simply disappear for tax purposes. The $100,000 gain gets reported on Schedule D for the year of the transfer, at long-term rates if the parent held the property more than a year.

The Recipient’s Dual Basis

The recipient needs a basis to figure gain or loss on any future sale. Part-sale, part-gift transfers produce two basis figures, and which one applies depends on what happens next.

Basis for a Future Gain

For calculating gain on a later sale, the recipient’s basis is the greater of the price they actually paid or the transferor’s adjusted basis at the time of the transfer.³ Using the earlier numbers, the child’s gain basis is $250,000, because that exceeds the parent’s $150,000 basis. If the child later sells for $500,000, they report $250,000 in capital gain.

Basis for a Future Loss

A separate rule applies if the recipient sells at a loss. For loss purposes, the basis cannot exceed the property’s fair market value on the date of the original transfer.³ This blocks the recipient from claiming a loss on value that eroded while the transferor still owned the property.

When the gain basis is higher than the loss basis, a sale price that lands between the two produces neither gain nor loss. The regulation gives this example: a parent transfers property worth $60,000 (basis $90,000) to a child for $30,000. The child’s gain basis is $90,000 and the loss basis is $60,000. A later sale for $75,000 falls between the two figures, so the child reports nothing.³

Holding Period

When the recipient’s basis comes from the transferor’s basis (because that basis was higher than the price paid), the recipient inherits the transferor’s holding period too. The property may already qualify for long-term capital gains rates the day the recipient takes title. If the recipient’s basis is the price they paid (because it exceeded the transferor’s basis), the holding period starts fresh on the transfer date. The distinction matters if the recipient sells within a year or two.

Gift Tax Paid

If the transferor actually pays gift tax on the transaction, the recipient’s basis increases by a portion of that gift tax under Section 1015(d).⁴ Most family transfers don’t trigger an actual gift tax payment because the lifetime exemption absorbs the taxable portion, but where it does apply, the adjustment lowers the recipient’s future tax bill.

Gift Tax on the Discount

The gift portion follows ordinary gift tax rules. The first $19,000 to any single recipient in 2026 is excluded entirely.⁵ Anything above that counts against the $15,000,000 lifetime exemption.¹ Taxable gifts usually don’t produce an immediate tax payment. They chip away at what you can eventually pass to heirs free of estate tax, and the IRS collects gift tax only after you exhaust the full $15,000,000.

Married couples can elect gift splitting, which treats any gift as if each spouse made half. The election doubles the annual exclusion to $38,000 per recipient and lets both lifetime exemptions absorb the taxable portion.⁶ Both spouses must file Form 709 for the year, even the one who made no gifts.⁷

What Gets Filed

If the gift component exceeds $19,000 for any single recipient, or if you elect gift splitting at any level, you must file Form 709 by April 15 of the year following the transfer.⁷ The return is required even when no gift tax is owed because the lifetime exemption covers the amount. Any capital gain on the sale portion goes on Schedule D for the same tax year. Income tax and gift tax stay on separate returns.

The recipient files nothing right away. The recordkeeping burden is real all the same. Keep documentation of the transferor’s adjusted basis, the price paid, the fair market value at transfer, and any gift tax the transferor paid. Without those records, figuring gain or loss on a later sale becomes guesswork, and the IRS can ask for the paperwork years later. Hold onto it until you dispose of the property and the statute of limitations on that return closes.

A Boundary Worth Knowing: Sales to Charity

If the buyer is a qualified charity rather than a family member, the income tax rules shift and usually produce a larger gain. In a charitable bargain sale, you allocate your basis between the sale portion and the gift portion using the ratio of the sale price to fair market value.⁸ Only a fraction of your basis offsets what the charity paid, compared with the full basis offset available on a family transfer. The gift portion qualifies for a charitable income tax deduction, which can offset some or all of the extra gain, and donations over $5,000 require Section B of Form 8283 with a qualified appraisal.⁹

1
Internal Revenue Service. What’s New – Estate and Gift Tax
2
eCFR. 26 CFR 1.1001-1 – Computation of Gain or Loss
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eCFR. 26 CFR 1.1015-4 – Transfers in Part a Gift and in Part a Sale
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Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
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Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
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Internal Revenue Service. Gifts and Inheritances
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Internal Revenue Service. Instructions for Form 709 (2025)
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eCFR. 26 CFR 1.1011-2 – Bargain Sale to a Charitable Organization
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Internal Revenue Service. Instructions for Form 8283