How Is the basis of property determined when it Is received as a gift?

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Casey Epton, CPA, is a Senior Tax Advisor at Deduction, where he helped design Taylor, CPAI from day one, building an AI tax agent that works seamlessly for both clients and the CPAs who verify every return.

Last updated:

Feb 2026

When you receive property as a gift, like stock, real estate, or a car, your tax basis (what you use to calculate gain or loss if you sell it) generally carries over from the donor. This rule, codified in IRC §1015, hasn't changed for TY 2025 and applies whether you're an individual taxpayer filing Form 1040 or helping family plan gifts.

Core Rules for Gains and Losses

Your basis splits into two scenarios based on the property's fair market value (FMV) at the gift date:

For gain: Use the donor's adjusted basis (their original cost + improvements - depreciation they claimed), increased by any gift tax they paid on the appreciation.
For loss (if FMV < donor's basis): Use the lower of donor's adjusted basis or FMV at gift.

No gain/loss zone: If you sell between FMV and donor's basis, report nothing—this blocks artificial gains or losses from the donor's ownership period.

Sale Scenario	Basis Used	Example Outcome
Sell > donor basis	Donor's adjusted basis (+ gift tax adjustment)	$10k gain if donor basis $30k, sell $40k
Sell < FMV (and FMV < donor basis)	FMV at gift	$5k loss if FMV $25k, sell $20k
Sell between FMV & donor basis	N/A	$0 gain/loss if donor $30k > sell $27k > FMV $25k

Holding Period and Gift Tax Details

Your holding period tacks on the donor's time owed (so long-term status if they held >1 year), as long as you're using carryover basis rules. IRS Pub. 551 (Rev. Dec. 2025) confirms this for capital gains qualification on later sales.

If gift tax was paid, add your share: (Appreciation / Gift amount) × Gift tax paid. Get this from the donor's Form 709 or statement—only boosts gain basis, not loss.

Steps for Taxpayers

Always ask the donor for: purchase date/cost, adjustment records, gift-date FMV (appraisal if needed), and gift tax details. Without them, IRS may challenge your basis on audit, forcing you to use zero or fight with limited proof. Track your own adjustments post-gift (e.g., improvements you make).

This setup favors gifting appreciated assets (preserves low basis for stepped-up gain potential later) but traps losses on depreciated ones, consider having the donor sell first if loss harvesting makes sense.

Sources:

IRS - Property (basis, sale of home, etc.)
IRC Section 1015, Basis of Property Acquired by Gifts and Transfers in Trust
IRS - About Publication 559, Survivors, Executors and Administrators
IRS - Publication 551, Basis of Assets

The information provided does not, and is not intended to, constitute legal advice.

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