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

When you sell property to a family member or anyone else for less than its fair market value, the IRS treats the deal as two transactions at once, and the part sale, part gift tax rules decide how each piece is taxed. The money the buyer pays is a sale that can produce a capital gain for you. The discount you handed them is a gift that counts against your $19,000 annual exclusion per recipient for 2026 and, beyond that, against the $15,000,000 lifetime exemption Congress set in the One, Big, Beautiful Bill signed in July 2025.¹ The buyer, meanwhile, inherits a basis in the property that will shape their own taxes whenever they sell.

How the Sale and Gift Portions Are Split

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

Nailing down fair market value matters more than any other number in the transaction. If the IRS later decides the property was worth more than you claimed, both your taxable gain and the size of the gift go up. For real estate and other high-value assets, a professional appraisal before closing is the standard protection. No statute requires one for a family transfer, but if the valuation is ever challenged, you want it in hand.

What the Seller Owes in Income Tax

A specific regulation governs income tax on part-sale, part-gift transfers. You compare the sale price against your entire adjusted basis in the property. If the sale price exceeds your basis, the difference is capital gain.²

If the sale price falls below your basis, you cannot claim a loss. The regulation flatly disallows it on any transfer that is partly a gift.² You chose to sell cheap; the shortfall is treated as generosity, not an economic loss.

A Worked Example

Say 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 $400,000 minus $250,000, or $150,000.
The taxable gain is $250,000 minus $150,000, or $100,000.
If the parent’s basis had instead been $300,000, the $50,000 shortfall would simply disappear. No loss, no deduction.

The $100,000 gain goes on the parent’s Schedule D for the year of the transfer. Long-term capital gains rates apply if the parent held the property more than a year before selling.

What the Buyer’s Basis Becomes

The buyer needs a tax basis to figure gain or loss when they eventually sell. The rule here is different from both a regular purchase and a pure gift, and it produces what practitioners call a dual basis.

Basis for a Future Gain

For calculating future gain, the buyer’s basis is the greater of the price they paid or the seller’s adjusted basis at the time of transfer.³ The seller’s unrecovered investment carries over if it was higher; otherwise the price paid sets the floor.

Back to the parent-child example: the child’s gain basis is $250,000, because the price paid exceeds the parent’s $150,000 basis. If the child later sells the property for $500,000, they report $250,000 in capital gain.

Basis for a Future Loss

A separate ceiling applies when the buyer sells at a loss. The loss basis cannot exceed the property’s fair market value at the time of the original transfer.³ The buyer cannot claim a tax loss on value that evaporated while the seller still owned the property.

When the gain basis sits above the loss basis, a future sale price that lands between them produces nothing at all. The regulation gives a direct illustration: a parent transfers property worth $60,000, with a $90,000 adjusted basis, to a child for $30,000. The child’s gain basis is $90,000 and loss basis is $60,000. If the child sells later for $75,000, that falls between the two figures, and the child reports no gain and no loss.³

Holding Period and Gift Tax Adjustment

If the buyer’s basis is tied to the seller’s basis because the seller’s basis was higher, the buyer also inherits the seller’s holding period. The property may already qualify for long-term rates on day one. If instead the buyer’s basis equals the price they paid, the holding period restarts on the transfer date. For a buyer who plans to resell within a year or two, that distinction can change the rate on the whole gain.

If the seller actually pays gift tax on the transfer, a portion of that tax increases the buyer’s basis under Section 1015(d).⁴ Most family transfers never produce an out-of-pocket gift tax payment because the lifetime exemption absorbs the gift, so this adjustment rarely comes into play.

The Gift Tax Side

The gift portion follows the same rules as any other gift. The first $19,000 you give any single recipient in 2026 is excluded from gift tax entirely.⁵ Anything above $19,000 is a taxable gift, but taxable does not mean you write a check. The excess simply reduces your $15,000,000 lifetime exemption.¹ Only after you burn through the full exemption does the IRS actually collect gift tax.

A taxable gift must be reported on Form 709, the federal gift tax return, due April 15 of the year after the transfer. Filing is required even when no tax is owed because the exemption covers the amount.⁶ An extension of your income tax return extends the gift tax return too.

Splitting Gifts With a Spouse

Married couples can elect to treat any gift as made half by each spouse. That doubles the annual exclusion to $38,000 per recipient and lets both spouses’ lifetime exemptions absorb the taxable portion.⁷ The election requires both spouses to file Form 709 for the year, even the spouse who gave nothing.⁶

Charitable Bargain Sales Work Differently

If the buyer is a qualified charity rather than a family member, the income tax rules shift and generally raise the seller’s taxable gain. You must allocate your adjusted basis between the sale portion and the gift portion in the same ratio as the sale price to fair market value.⁸ Only a fraction of your basis offsets the sale price.

Suppose you own property worth $200,000 with a $100,000 basis and sell it to a charity for $120,000. The allocated basis for the sale portion is $100,000 times $120,000/$200,000, or $60,000. Taxable gain is $60,000. In a family transfer with identical numbers, the full $100,000 basis offsets the $120,000 price and the gain is only $20,000.

The trade-off is that the gift portion to charity qualifies for a charitable income tax deduction, which can offset some or all of the larger gain. Donated property above $5,000 requires Section B of Form 8283 and a qualified appraisal.⁹

Records to Keep on Both Sides

The seller reports any capital gain on Schedule D for the year of the transfer and files Form 709 if the gift portion exceeds the annual exclusion or if gift splitting is elected.

The buyer has no immediate filing to make, but the recordkeeping is real work. Keep the seller’s adjusted basis, the price paid, the fair market value at transfer, the appraisal, and documentation of any gift tax the seller paid. Without those numbers, calculating gain or loss on a future sale becomes guesswork, and the IRS can ask for the records years later. Hold them for as long as you own the property, and then until the statute of limitations closes on the return reporting the eventual sale.

1
Internal Revenue Service. What’s New – Estate and Gift Tax
2
eCFR. 26 CFR 1.1001-1 – Computation of Gain or Loss
3
eCFR. 26 CFR 1.1015-4 – Transfers in Part a Gift and in Part a Sale
4
Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
6
Internal Revenue Service. Instructions for Form 709 (2025)
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Internal Revenue Service. Gifts and Inheritances
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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