The capital gains tax on gifted property is calculated by subtracting the donor’s original cost basis from your sale price, not the property’s value on the day you received it. That single rule drives almost every surprise people run into. 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 asset was already worth $80,000 the moment it hit your account.
Carryover Basis Is the Starting Point
Under Section 1015 of the Internal Revenue Code, your basis in a gifted asset equals 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 means the appreciation that built up during the donor’s ownership becomes your tax responsibility when you sell. The rule exists so that gifting an appreciated asset doesn’t erase the gain the donor would have owed on a sale.
To calculate what you owe, you need three facts: the donor’s adjusted basis just before the gift, the fair market value at the time of the gift, and any federal gift tax the donor paid on the transfer.2Internal Revenue Service. Publication 551 – Basis of Assets The burden of proving basis falls on you. Without records, the IRS may treat your entire sale price as taxable gain.
When the Gift Had Already Lost Value
There’s an exception when the property was worth less than the donor’s basis on the gift date. In that case you have two separate bases depending on what happens next.3Internal Revenue Service. Frequently Asked Questions on Property Basis For calculating a gain, use the donor’s adjusted basis. For calculating a loss, use the fair market value at the time of the gift.
Suppose an 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 $5,000 measured from her 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 during her ownership simply disappears from the tax system. The rule stops people from shifting a built-in loss to someone else just to claim the deduction.
The No Gain, No Loss Zone
The dual basis rule creates an odd outcome when your sale price lands between the two basis figures. The Treasury Regulation illustrates this with a donor basis of $100,000, a fair market value at the gift of $90,000, and a sale by the donee at $95,000. There’s no gain because the gain basis ($100,000) exceeds the sale price. There’s no loss because the sale price exceeds the loss basis ($90,000). The reported result is zero.4eCFR. 26 CFR 1.1015-1 – Basis of Property Acquired by Gift After December 31, 1920 You still report the sale, but you enter zero as the gain or loss.
Adjustments That Can Raise Your Basis
Your carryover basis isn’t necessarily your final basis. Two adjustments can reduce the taxable gain.
If the donor paid federal gift tax on the transfer, you can add the portion attributable to the appreciation. Multiply the gift tax paid by a fraction: net appreciation (fair market value minus donor’s adjusted basis) over the taxable value of the gift after any annual exclusion.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust The increase can’t push your basis above the fair market value at the gift date.2Internal Revenue Service. Publication 551 – Basis of Assets In practice this adjustment only matters for very large gifts where the donor actually owed gift tax, which requires exceeding the lifetime exemption.
Capital improvements you make after receiving the property also increase your basis. For real estate, that includes adding a room, replacing a roof, or installing a new heating system. Routine maintenance and cosmetic repairs don’t count. If you received a house with a $150,000 carryover basis and spent $40,000 on a qualifying renovation, your adjusted basis becomes $190,000.
Short-Term or Long-Term: How the Holding Period Works
The tax rate on your gain depends on how long the property was held. For gifted property, the holding period rule works in your favor: when the carryover basis applies, you tack the donor’s holding period onto your own.5Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property If the donor held the asset for fifteen years, your holding period is already well past one year the day you receive it. You could sell the next day and still get long-term capital gains treatment.
The exception: if the dual basis rule forces you to use the fair market value as your basis for a loss, the holding period starts fresh on the date you received the gift. Sell at a loss within a year and that loss is short-term.
Tax Rates on the Gain
Short-term capital gains, from assets held one year or less, are taxed at ordinary income rates. Long-term capital gains are taxed at 0%, 15%, or 20%.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses For 2026, single filers pay 0% on long-term gains if taxable income is $49,450 or less, 15% between $49,450 and $545,500, and 20% above that. Married couples filing jointly reach the 15% bracket at $98,900 and the 20% bracket at $613,700.
Two extra layers catch people off guard. Gains on collectibles like art, coins, antiques, and precious metals are taxed at a maximum 28% rate rather than the usual 20% ceiling. And a 3.8% Net Investment Income Tax applies on top of your regular capital gains rate when your modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly. Those NIIT thresholds aren’t indexed for inflation and haven’t moved since 2013.7Internal Revenue Service. Net Investment Income Tax
A high-income taxpayer selling a gifted asset could pay a combined federal rate of 23.8% (20% plus NIIT), or 31.8% on collectibles. Many states tax capital gains as well, with rates roughly between 1% and over 13%.
What Happens If You Sell at a Loss
A capital loss offsets 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. Unused losses carry forward indefinitely.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses A large loss produced under the dual basis rule may take several years to use up.
If the Gift Was a Home You Live In
When someone gifts you a home and you live in it as your primary residence, you may qualify for the Section 121 exclusion when you sell. It lets you exclude up to $250,000 of gain, or $500,000 for married couples filing jointly, from taxable income.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 of ownership and use don’t need to be continuous. Because you inherit the donor’s holding period, the ownership test can be easy to meet, but the use test runs on your own clock: you personally must have lived there two years.
Say a parent bought a home for $100,000 decades ago, gifts it to you when it’s worth $500,000, and you live in it for two years before selling for $550,000. Your gain is $450,000 (sale price minus the $100,000 carryover basis). A single filer can exclude $250,000, cutting the taxable gain to $200,000.
Why Gifted Is Taxed Harder Than Inherited
If you were about to receive property through inheritance instead of a lifetime gift, the math is very different. Inherited property generally gets a stepped-up basis equal to fair market value at the date of death under Section 1014, which wipes out the lifetime appreciation for capital gains purposes. Using the same stock example: inheriting the $80,000 stock gives you an $80,000 basis and zero gain on an immediate sale. Receiving it as a gift gives you a $10,000 basis and a $70,000 gain on that same sale. If the donor is elderly and the asset is highly appreciated, that asymmetry is why advisors often suggest holding the property rather than gifting it.
Records You Need From the Donor
Because basis documentation falls on you, collect it at the time of the gift if possible: the donor’s adjusted basis just before the gift, the fair market value on the gift date, and whether any gift tax was paid.2Internal Revenue Service. Publication 551 – Basis of Assets For stock, that means the original purchase price and date, plus any reinvested dividends or stock splits. For real estate, the original purchase price and records of capital improvements the donor made. A professional appraisal is worth the cost for high-value property, particularly real estate where the dual basis rule might apply.
If the donor filed Form 709 to report the gift, that return often documents both fair market value and adjusted basis. Ask for a copy. Without any documentation, you may end up treating the entire sale price as gain, which is the worst possible outcome and entirely avoidable.
How to Report the Sale
You report the sale on Form 8949 and carry the totals to Schedule D of Form 1040.9Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets You’ll need the donor’s original acquisition date (for the holding period), your sale date, the sale price, and your adjusted basis. If the dual basis rule puts you in the no-gain-no-loss zone, report the sale and enter zero.
Watch out for one trap. Your brokerage or closing agent may report the sale on Form 1099-B using a basis that doesn’t match your carryover basis. For gifted property, the 1099-B cost basis is frequently wrong or listed as unknown, because the broker only knows what the asset was worth when it transferred into your account. Correct this on Form 8949 using column (g) to adjust the reported basis to your actual carryover basis. Skipping that adjustment is one of the most common mistakes on gifted-property sales and will almost certainly trigger an IRS notice.