Understanding Taxes on Gifted Property Sales: Key Rules and Examples

Selling gifted property can have unexpected tax implications, and understanding these rules is crucial to avoid surprises. Your tax liability hinges on the property’s basis—a key figure that determines your gain or loss. This article explores how the IRS calculates basis for gifted property and what you need to know to stay compliant.

In most situations, the basis of an asset is its cost to you. For property received as a gift, however, special basis rules apply.

Carryover Basis for Gift Property

The general rule is that you receive the same basis in the property that the donor had in it. This is sometimes called a carryover basis, because the donor’s basis carries over to you as the donee.

Many taxpayers are unaware of this rule and mistakenly believe their basis to be the value of the gift when they receive it.

Example

Larry buys stock for $1,000 and gives it to a relative (Ellen) when it’s worth $8,000. Ellen later sells it for $11,000. Ellen’s basis in the stock is only $1,000, the same basis Larry had. So, Ellen must report $10,000 of gain on the sale.

Note: If Ellen had sold the property for just $6,000, Ellen would still have to report a gain (of $5,000 on her $1,000 basis), even though the property declined in value in Ellen’s hands. Ellen would only be able to report a loss if they were to sell it for less than $1,000.

Loss on Gift Property

Special rules apply for property which has gone down in value in the hands of the donor. For such property, at the time of the gift, the donor’s basis (cost) will be higher than the value of the property.

In this case, you must keep track of two figures for basis purposes. To measure gain on a later sale, the general carryover basis rule applies, so your basis is the same that the donor had. But to measure loss on a later sale, your basis is limited to the (lower) value of the property at the time of the gift.

Example 1

Ken buys stock for $12,000 and gives it to a relative (Sam) when it’s worth $8,000. Sam later sells it for $6,000. To measure loss, Sam’s basis in the stock is $8,000, the value of the stock on the date of the gift. So, Sam has only a $2,000 loss on the sale.

Example 2

The facts are the same as in Example 1, except that Sam sells the stock for $15,000. To measure gain, Sam’s basis is $12,000, the same basis Ken had. Thus, Sam’s gain is $3,000.

If a recipient of loss property sells it for a price that falls between the property’s basis at the time of the gift and its lower market value, the sale will result in neither a gain nor a loss.

Example 3

The facts are the same as in Example 1, except that Sam sells the stock for $10,000. Here, to measure Sam’s loss, Sam’s basis would be $8,000, so there’s no loss on the sale for $10,000. Similarly, to measure Sam’s gain, Sam’s basis would be $12,000, so there’s no gain on a sale for $10,000. So, Sam would report no gain or loss.

Did the Donor Pay Gift Tax?

If the value of the gift is more than $18,000 (the gift tax annual exclusion for 2024), the donor may have paid federal gift taxes on it.

If this is the case and the property had appreciated in value in the donor’s hands, you’ll be able to increase your basis. The rule is you add to your basis that portion of the gift tax paid which is allocable to the increase in value at the date of the gift.

Example

Larry buys stock for $50,000 and gives it to Denise when its value is $150,000. Larry pays $30,000 in federal gift tax on the transfer. The increase in value ($100,000) is two-thirds of the value of the gift.

So, this will increase Denise’s basis in the stock by $20,000 (two-thirds of the $30,000 in gift tax paid). Denise’s total basis is thus $70,000: the $50,000 carryover basis, plus the $20,000 under the gift tax rule.

Getting Basis Information from the Donor

It’s important to get the basis information you need from the donor. Many donors include this in the cover letter that accompanies the gift.

If you didn’t get the basis from the donor, you may find it awkward to say, “Thanks for the generous gift, what did you pay for it?”

It often makes sense to have your accountant reach out to the donor on your behalf to explain the need from the tax standpoint.

After receiving a gift, get the basis information you need as soon as possible: the donor may destroy the records needed to establish basis once he or she has given away the property.

If you can’t establish basis, IRS can impose a zero basis, in which case you’ll have to report the entire sale price as gain. Don’t put yourself at risk of having to pay more taxes.

Protect Your Finances with Accurate Basis Reporting

Tax implications for selling gifted property depend on accurately determining its basis. To ensure proper reporting and minimize risks, gather basis information promptly from the donor and consult a tax professional if needed. With these steps, you’ll be prepared to handle the sale of gifted property confidently and in compliance with IRS rules.

View IRS information on basis of gift property.