The cost basis of gifted property is generally whatever the donor paid for it, adjusted upward for improvements and downward for any depreciation they claimed. That figure carries over to you and determines your taxable gain when you sell. One important exception: if the property was worth less than the donor’s basis on the day of the gift, you have to track two separate numbers and apply whichever one produces the correct result for a gain or a loss.
The Carryover Basis Rule
When you receive property worth more than the donor paid, your basis equals the donor’s adjusted basis at the time of the gift.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust Adjusted basis means the original purchase price, plus permanent improvements, minus any depreciation or other reductions.
Say your parent bought stock for $30,000 and it’s worth $50,000 when they hand it to you. Your basis is $30,000. Sell later for $55,000 and your taxable gain is $25,000. The same rule applies whether the gift is real estate, a vehicle, art, or any other capital asset. The type of property doesn’t change the answer.
The point of carryover basis is that appreciation built up on the donor’s watch stays taxable. Shifting the asset to a relative doesn’t erase the embedded gain, it just moves whose return reports it. The most common mistake is failing to track the donor’s original cost, and it usually surfaces years later when the property is finally sold and no one has the records.
When the Property Has Lost Value: The Dual Basis Rule
If the fair market value on the gift date is lower than the donor’s adjusted basis, you have to track two figures: the donor’s basis (used to calculate a gain) and the fair market value on the gift date (used to calculate a loss).2Internal Revenue Service. Publication 551 – Basis of Assets
Suppose your uncle paid $10,000 for shares worth $8,000 when he gives them to you. Sell later for $12,000 and your gain is $2,000, measured against the donor’s $10,000 basis. Sell for $7,000 and your loss is $1,000, measured against the $8,000 gift-date value. The gain and loss calculations deliberately use different starting points.
The No-Gain, No-Loss Zone
When the sale price lands between the two figures, you recognize neither gain nor loss. Using the same example, a sale at $9,000 tests as a $1,000 loss against the $10,000 donor basis and as a $1,000 gain against the $8,000 fair market value. The two tests contradict each other, so the result is zero.2Internal Revenue Service. Publication 551 – Basis of Assets You report the sale with no taxable consequence.
This dead zone exists so that donors can’t manufacture a deductible loss by gifting depreciated property to someone who then sells it. The only losses you can claim on a gifted asset are losses that happened while you owned it. Using the donor’s higher basis to calculate a loss overstates the deduction, and the IRS routinely catches it. Keep both figures in your records from day one.
How the Holding Period Works
Long-term capital gains rates apply to property held more than one year. Whether the donor’s holding period counts toward yours depends on which basis you end up using.
When you use carryover basis to calculate a gain, the donor’s holding period tacks onto yours.3Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property If your grandmother held stock for eleven months before giving it to you and you sell two months later, you’ve cleared the one-year threshold. You inherited her time along with her basis.
When the dual basis rule sends you to fair market value to calculate a loss, the holding period resets. Your clock starts the day after you received the gift.4Internal Revenue Service. Instructions for Form 8949 Selling before you cross the one-year mark produces a short-term loss instead of a long-term one. Gains and losses get reported on Form 8949 with the acquisition date in a separate column, and getting that date wrong can shift the rate on the entire transaction.
Gift Tax Paid by the Donor Can Increase Your Basis
If the donor actually paid federal gift tax on the transfer, a portion of that tax gets added to your basis. For gifts made after 1976, the increase is limited to the share of gift tax that corresponds to the property’s appreciation.5eCFR. 26 CFR 1.1015-5 – Increased Basis for Gift Tax Paid
The formula: divide net appreciation (fair market value minus the donor’s adjusted basis) by the total value of the gift, then multiply the ratio by the gift tax paid. If the donor’s basis was $200,000, the gift was worth $500,000, and the donor paid $100,000 in gift tax, the net appreciation is $300,000. The ratio is 0.60, and 0.60 times $100,000 is $60,000 added to basis. Your basis becomes $260,000.
In practice, few recipients see this adjustment. The 2026 lifetime gift and estate tax exemption is $15,000,000, raised by the One, Big, Beautiful Bill signed in July 2025.6Internal Revenue Service. What’s New – Estate and Gift Tax Unless the donor has burned through that exemption with prior gifts, no gift tax is actually owed and there’s nothing to add.
Gifts of Property With a Mortgage or Other Debt
When the property comes with debt attached, the transfer isn’t purely a gift. The IRS treats any debt you assume (or take the property subject to) as consideration paid to the donor, making it part gift and part sale.
Under the part-gift, part-sale rules, your basis is the greater of the amount you effectively paid (the debt) or the donor’s adjusted basis, plus any gift tax adjustment.7eCFR. 26 CFR 1.1015-4 – Transfers in Part a Gift and in Part a Sale If the donor’s basis in a house is $150,000 and the outstanding mortgage is $120,000, your basis is $150,000 because the donor’s basis exceeds what you assumed. If the mortgage were $180,000, your basis would be $180,000 because the debt exceeds the donor’s basis.
The donor’s side matters too. When the debt exceeds the donor’s adjusted basis, the donor recognizes taxable gain on the difference. A parent who gives away property with a $200,000 mortgage and a $140,000 basis has $60,000 of income to report, even though they received no cash. Worth flagging before any gift of encumbered property goes through.
For loss purposes, your basis in a part-gift, part-sale can never exceed the fair market value on the date of transfer. The dual basis principle carries into these hybrid transactions.
Depreciable Property Brings Recapture With It
Gifting business equipment, rental property, or other depreciable assets doesn’t trigger depreciation recapture for the donor at the time of the gift.8Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property The recapture liability transfers to you. When you eventually sell for more than the depreciated basis, the IRS recaptures the depreciation as ordinary income, including depreciation the donor claimed during their ownership.
The statute reaches that result by defining “recomputed basis” to include depreciation deductions allowed to “any other person,” not just the current owner.8Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property If your father claimed $80,000 in depreciation on a rental before gifting it to you, that full $80,000 is potential ordinary income on your future sale. Ask for the donor’s depreciation schedule, not just the original purchase price.
Gifts and Inheritances Follow Different Rules
If you’re expecting the property you received to have been “stepped up” to current market value, that’s the inheritance rule, not the gift rule. They produce very different numbers.
Property you inherit generally takes a basis equal to the fair market value on the date the owner died.9Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If a parent bought a house for $100,000 and it was worth $500,000 when they died, your basis is $500,000. Sell it the next week for $505,000 and your taxable gain is just $5,000. The $400,000 of appreciation that built up during the parent’s life disappears for income tax purposes.
Receive the same house as a lifetime gift and your basis is $100,000. Selling for $505,000 produces a $405,000 gain. The tax difference can easily run into six figures, which is why advisors often steer elderly parents away from gifting highly appreciated assets. Holding until death preserves the step-up for the heirs.
Records You Need From the Donor
Establishing basis is your responsibility as the taxpayer. The IRS doesn’t track what your donor paid for an asset decades ago, and if you can’t prove your basis, you can end up taxed on the full sale price as if your basis were zero. Getting records at the time of the gift is much easier than reconstructing them later.
At minimum, get three things from the donor: the original purchase price, the cost of any improvements that increased adjusted basis, and the fair market value on the date of the gift.2Internal Revenue Service. Publication 551 – Basis of Assets For real estate, settlement statements and contractor invoices establish the first two. For stocks, brokerage statements showing purchase date and price per share work. A professional appraisal or documented market valuation covers the fair market value, which you’ll need if the dual basis rule ever applies.
If the gift was large enough to require Form 709, ask for a copy. That return shows the valuation the donor reported to the IRS and confirms whether any gift tax was actually paid. For depreciable property, get the donor’s depreciation schedule so you can calculate recapture when you sell.
Store everything permanently. There’s no statute of limitations on the basis question itself, because the clock doesn’t start until you sell and file a return reporting the transaction. A gift received in 2026 might not be sold until 2056, and you’ll still need the documentation.