The basis of property received as a gift is generally the donor’s adjusted basis at the moment of the transfer, a rule known as carryover basis under Internal Revenue Code Section 1015. That means when you sell, your taxable gain or loss is measured from what the donor paid (adjusted for improvements and depreciation), not from what the property was worth on the day it landed in your hands. One important twist: if the property had lost value before the gift, a second figure — the fair market value on the date of the gift — takes over for calculating a loss.
What Carryover Basis Actually Includes
Your starting number is the donor’s adjusted basis immediately before the gift. In most cases, that’s the donor’s original purchase price, plus capital improvements they made, minus any depreciation they claimed. A rental house the donor bought for $200,000, improved by $40,000, and depreciated by $50,000 carries an adjusted basis of $190,000. That figure follows the property to you.
You effectively step into the donor’s tax position, which is why gathering their records matters. If documentation is missing, the IRS doesn’t default to a basis of zero. Under Section 1015(a), the IRS attempts to obtain the facts from the donor, a prior owner, or any other knowledgeable person, and if that fails, it estimates the fair market value on the date the donor originally acquired the property.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust Better than zero, but reconstructing decades-old values is a headache worth avoiding.
The Dual Basis Rule for Gains and Losses
Gifted property can carry two basis figures at once. Which one you use depends on whether you sell at a gain or a loss. Congress built this split to stop donors from handing off built-in losses to family members who could then deduct declines in value they never experienced.
You need two numbers: the donor’s adjusted basis and the fair market value (FMV) on the date of the gift. If FMV equals or exceeds the donor’s basis, the rule is irrelevant because both point the same way. The dual basis only bites when the property had already lost value before you received it — meaning FMV at the gift date is lower than the donor’s basis.2Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
Selling at a Gain
Sell for more than the donor’s adjusted basis and you use the donor’s adjusted basis to calculate gain. Donor’s basis of $100,000, sale price of $200,000, taxable gain of $100,000. Any adjustment for gift tax paid gets added to the donor’s basis before you run this calculation.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
Selling at a Loss
Sell for less than the FMV on the date of the gift and you use that FMV as your basis for the loss. Donor’s basis was $100,000, FMV at the gift was $80,000, and you sell for $70,000. Your recognized loss is $10,000, not $30,000. The $20,000 decline that occurred on the donor’s watch is gone; neither of you gets to deduct it.2Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
The No-Gain, No-Loss Zone
Sell for a price between the two basis figures and you report nothing. Same numbers: donor’s basis of $100,000, FMV at the gift of $80,000. Sell for $90,000. Calculating a gain against the $100,000 basis produces a $10,000 loss. Calculating a loss against the $80,000 FMV produces a $10,000 gain. Because the two methods contradict each other, the result is zero.2Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
Adjustment for Gift Tax Paid
If the donor paid federal gift tax on the transfer, part of that tax gets added to your basis — but only the portion attributable to the property’s net appreciation.3Internal Revenue Service. What’s New — Estate and Gift Tax
The formula: multiply the gift tax paid by a fraction. The numerator is net appreciation (FMV minus donor’s adjusted basis). The denominator is the amount of the gift for gift tax purposes (FMV reduced by the annual exclusion and any marital or charitable deduction).
Publication 551’s example: your mother gives you property worth $50,000 in 2025. Her adjusted basis is $20,000. The gift amount is $31,000 ($50,000 minus the $19,000 annual exclusion). She pays $6,220 in gift tax. Your basis increase is $6,220 × ($30,000 ÷ $31,000) = $6,033. Your total basis becomes $26,033.2Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
The increase can never exceed the actual gift tax paid, and if there’s no net appreciation (donor’s basis is at or above FMV), there’s no adjustment at all.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
Holding Period: When You Get the Donor’s Time
Long-term capital gains rates are considerably lower than short-term rates, so how long the property is deemed held matters. Under Section 1223, when your basis is determined by reference to the donor’s basis, you tack the donor’s holding period onto yours. If your mother held stock for three years before gifting it, your holding period starts when she bought it.4Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
The catch: tacking only applies when you’re using the donor’s carryover basis, which is the gain scenario. If you end up using the FMV loss basis because the property declined before the gift, your holding period starts fresh on the date of the gift. That can convert an expected long-term loss into a short-term one.
Depreciable Property Brings Recapture With It
Rental real estate, business equipment, and vehicles used in a trade come with a hidden liability. The carryover basis includes the donor’s depreciation history, and when you sell, the IRS wants that depreciation back.
For tangible personal property (Section 1245 property), the gift itself triggers no recapture for the donor.5Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property But the obligation follows the property to you. When you sell for more than the depreciated basis, the gain attributable to prior depreciation is taxed as ordinary income, regardless of how long you’ve held the property.
For real estate (Section 1250 property), the concern is unrecaptured Section 1250 gain. If the donor claimed depreciation on a rental building, the portion of your gain attributable to that accumulated depreciation is taxed at a maximum rate of 25%, and any gain above the total depreciation taken gets the regular long-term rate. Always get the donor’s complete depreciation schedule before accepting gifted business or rental property.
Suspended Passive Losses Boost Basis
Donors who gift rental property or other passive activities often have accumulated losses they were never allowed to deduct. When that property is transferred by gift, those suspended losses increase the donor’s basis immediately before the gift, and the higher basis carries over to you.6Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
Neither you nor the donor ever gets to deduct those losses directly; they’re permanently disallowed. Instead, the increased basis reduces your taxable gain when you sell. Donor basis of $14,000 plus $25,000 in suspended losses produces a carryover basis of $39,000. Sell for $50,000 and your gain is $11,000, not $36,000.
There’s a trap. The dual basis rule still applies. If FMV at the gift date was less than the inflated basis (say, $15,000 FMV against $39,000 adjusted basis), the suspended losses effectively vanish for loss purposes. The donor would have been better off selling the property personally and recognizing the losses.
Part Gift, Part Sale
Family members sometimes sell property to each other at a steep discount, such as a parent selling a $300,000 house to a child for $100,000. The IRS treats these as part gift and part sale. Your basis for gain is the greater of what you paid or the donor’s adjusted basis. Your basis for loss can’t exceed FMV at the transfer.7eCFR. 26 CFR 1.1015-4 – Transfers in Part a Gift and in Part a Sale
Your father sells you property with a $90,000 adjusted basis and a $60,000 FMV for $30,000. Your gain basis is $90,000. Your loss basis is capped at $60,000. The same no-gain, no-loss zone from the regular dual basis rule can apply here too.
Spouse and Divorce Transfers Follow Different Rules
Property transferred between spouses, or to a former spouse as part of a divorce settlement, falls under Section 1041 rather than Section 1015. No gain or loss is recognized on the transfer, and the receiving spouse takes the transferring spouse’s adjusted basis, full stop. The dual basis rule doesn’t apply. A transfer to a former spouse qualifies as long as it occurs within one year after the marriage ends or is related to the divorce.8Office of the Law Revision Counsel. 26 USC 1041 – Transfers of Property Between Spouses or Incident to Divorce One exception: if your spouse or former spouse is a nonresident alien, the regular Section 1015 basis rules apply.
Gifts Versus Inheritance: A Big Difference
If you’re weighing whether to receive appreciated property now or wait for an inheritance, the tax difference is significant. Inherited property generally receives a stepped-up basis equal to its FMV on the date of death. A house purchased for $50,000 that’s worth $500,000 when the owner dies gets a $500,000 basis in the heir’s hands. Sell it the next day for $500,000 and you owe zero capital gains tax.9Internal Revenue Service. Gifts and Inheritances
Had the same property been gifted before death, the recipient would carry over the $50,000 basis and face a $450,000 taxable gain on that same sale. The step-up at death also wipes out depreciation recapture that a gift recipient would owe on rental property. For highly appreciated assets, the math strongly favors holding until death.
In community property states, when one spouse dies, both halves of community property — including the surviving spouse’s share — receive a stepped-up basis to FMV.10Internal Revenue Service. Publication 555, Community Property
What to Get From the Donor Before You Need It
Reconstructing records years after a gift is painful. Collect what you need at the time of the transfer:
- Original purchase price and date: closing statement for real estate, trade confirmation for securities, or receipt for other property.
- Capital improvement records: receipts for additions, renovations, or upgrades that increased value or useful life.
- Depreciation schedules: for business or rental property, the full history of depreciation claimed.
- Fair market value at the gift date: a qualified appraisal for real estate or closely held business interests, or a brokerage statement for publicly traded securities.
- The donor’s Form 709, if filed, showing the reported value and any gift tax paid.
- Suspended passive loss records for passive activities.
For real estate and other high-value property, a contemporaneous appraisal establishes the FMV you’ll need for the dual basis rule. Appraisals should follow the Uniform Standards of Professional Appraisal Practice and include a property description, the valuation method used, and the appraiser’s qualifications. Without one, you may end up arguing FMV with the IRS years later using whatever comparable sales data you can piece together.