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Selling Gift Property

Figuring out Capital Gains when Selling Property Received as a Gift

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People often end up owning real estate and other property when the original owner has given that property to them. Transfers of property given before the original owner dies is called a gift. Recipients of gift property have different tax consequences than recipients of inherited property.

The Basics: How Gifts Interact With Taxes

The recipient of a gift does not pay any taxes or report any income when the gift property is received. Instead, the new owner of the property will report any gain or loss on the property.

How Capital Gains are Calculated on Gift Property

Capital gains or losses on property received as a gift are calculated with respect to the original owner's cost basis in the property. In other words, when property is given, the recipient receives both the property and the property's cost basis. The recipient also receives the donor's holding period in the property for determining whether a gain is long-term or short term.

The basis of gift property is the original owner's cost basis, plus or minus any adjustments. Typical adjustments that increase basis are substantial repairs and improvements, along with any expenses for selling the property (such as broker's commissions). Typical adjustments that reduce basis are depreciation the previous owner claimed for renting out the property.

The recipient's gain or loss on the gift property will be the selling price minus this adjusted cost basis.

Recordkeeping Tips for Gift Property

  • Ask the donor to provide you with the cost basis of the property.
  • Ask the donor to let you know the date he or she original purchased the property.
  • Obtain a copy of an escrow statement to document the amount and date of the purchase.
  • Obtain an estimate of the fair market value of the property on the date of the gift transfer. Sometimes the market value comes into play with gain or loss calculation.

Tax Strategies for Gift Property

If you received real property as a gift, consider living in the property for at least two years before selling the property. This will make you eligible for a capital gains exclusion of up to $500,000 on the sale of a primary residence.

If the property is being rented out, consider a Section 1031 exchange to defer the tax.

Consider giving the property. This would transfer the tax liability to the new owner.

Consider leaving the property as an inheritance. This could help minimize any capital gains taxes.

Consider donating the property to charity. Charities can sell properties without paying any capital gains tax, while the donor would receive a tax deduction for the fair market value of the property as a charitable donation.

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