Quick overview
Gifting appreciated real estate is a common strategy for passing wealth to family or supporting charities, but it changes who ultimately pays tax on the property’s built-in gain. The donor typically avoids immediate capital gains tax at the time of the gift, but the recipient takes on the donor’s adjusted basis (carryover basis). That means when the recipient sells, they may owe capital gains tax on the appreciation that accrued while the donor owned the property (see IRS guidance on gift tax and basis transfer).
For current, year-specific limits and filing requirements, always check the IRS Gift Tax resource (https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax) and the Form 709 instructions (https://www.irs.gov/forms-pubs/about-form-709).
How basis and capital gains work after a gift
-
Carryover basis: For most lifetime gifts of appreciated property, the recipient’s basis equals the donor’s adjusted basis (original purchase price plus documented improvements, adjusted for depreciation if applicable). This rule is explained in IRS Publication 551 (Basis of Assets) (https://www.irs.gov/publications/p551).
-
Example (illustrative): If a donor bought a rental home for $200,000 (adjusted basis after improvements) and its current fair market value (FMV) is $500,000, the recipient’s basis is generally $200,000. If the recipient later sells for $550,000, their capital gain is $350,000 (sale price minus $200,000 basis), subject to long-term capital gains rates and possibly the Net Investment Income Tax (NIIT) (https://www.irs.gov/individuals/net-investment-income-tax).
-
No stepped-up basis on lifetime gifts: Unlike inherited property, which often receives a stepped-up basis at death, lifetime gifts do not get a stepped-up basis. That distinction is one of the most common surprises for families transferring real estate during the donor’s lifetime.
Gift tax reporting and when to file Form 709
-
Annual exclusion vs. taxable gifts: Most gifts fall under the annual gift tax exclusion and require no gift tax payment. The annual exclusion amount is indexed for inflation and can change year to year—confirm the current amount on the IRS site. If the value of the gift to a single recipient exceeds the annual exclusion for the year, the donor must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if no tax is currently due because of the lifetime exemption.
-
Lifetime exemption: The gift and estate tax system includes a lifetime exemption (also called the unified credit). Gifting over the annual exclusion uses part of that exemption. Because legislative changes can affect the exemption amount, verify current figures before planning large gifts.
-
Reporting specifics for real estate: When you file Form 709 for a real estate gift, you must attach supporting documentation that establishes FMV (an appraisal is common) and the donor’s adjusted basis (purchase documents, closing statements, and records of capital improvements). The Form 709 instructions provide required schedules and valuation guidance (https://www.irs.gov/forms-pubs/about-form-709).
Capital gains tax for the recipient
-
When the recipient sells: The recipient pays capital gains tax based on the difference between the sale price and the carryover basis. Long-term capital gains rates apply if the recipient’s holding period includes the donor’s holding period for determining long-term status in many cases (see Publication 551 and Topic No. 409, Capital Gains and Losses: https://www.irs.gov/taxtopics/tc409).
-
Depreciation recapture on rental property: If the property was used for rental and depreciation was claimed, the recipient may face depreciation recapture taxed at ordinary income rates upon sale to the extent recapture rules apply.
-
Net Investment Income Tax: High-income recipients may also owe the 3.8% NIIT on net investment income (https://www.irs.gov/individuals/net-investment-income-tax).
Giving real estate to charity vs. to individuals
-
Charitable gifts: Donating appreciated real estate directly to a qualified charity usually lets the donor claim a charitable income tax deduction (subject to AGI limits and valuation rules) and the charity typically sells the property without paying capital gains tax—making charitable giving of appreciated property tax-efficient. See IRS guidance on charitable contributions of property (https://www.irs.gov/charities-non-profits/charitable-contributions).
-
Using charitable vehicles: Charitable remainder trusts (CRTs) and donor-advised funds are often used to receive high-value appreciated real estate. A CRT can sell the property without immediate capital gains tax within the trust, provide an income stream to the donor or other beneficiaries, and ultimately pass the remainder to charity. These structures have complex rules and require legal and tax counsel.
-
FinHelp interlink: For steps and timing when donating property, see our guide on Gifting Real Estate to Charity: Steps, Taxes, and Timing (https://finhelp.io/glossary/gifting-real-estate-to-charity-steps-taxes-and-timing/).
Strategies to reduce tax friction (practical tips)
-
Consider gifting at death vs. lifetime gifting: If your goal is to eliminate built-in capital gains for heirs, leaving property at death can provide a stepped-up basis (subject to estate tax exposure). Compare estate tax implications vs. gift tax consequences with a professional.
-
Time gifts across years and recipients: Spreading gifts over multiple years and multiple recipients can reduce or avoid gift tax reporting by using the annual exclusion where appropriate. See our explainer on How the Federal Gift Tax Exclusion Works (https://finhelp.io/glossary/how-the-federal-gift-tax-exclusion-works/).
-
Sell and gift the proceeds: In some scenarios, selling the property and gifting cash may be preferable—especially if the donor can offset gain with losses or use exclusions (e.g., primary residence rules) or if the donor wants to use the proceeds for charitable gifting.
-
Use a qualified appraisal: For high-value real estate gifts, obtain a qualified appraisal to support FMV on Form 709 and for any income tax deduction if the recipient is a charity.
-
Consider installment sales to family members or private loans: Selling the property to family at a fair market price with seller financing can spread gain recognition and retain leverage; however, transaction must be structured at arm’s length and documented. Consult counsel.
Common mistakes and how to avoid them
-
Skipping documentation: Failing to document the donor’s basis (purchase price, closing statements, records of capital improvements) makes future tax reporting difficult and can increase tax bills.
-
Assuming no tax consequences: Lifetime gifts can create tax liability for recipients when they sell; donors sometimes mistakenly think gifting erases tax on built-up gain.
-
Forgetting state taxes: State-level gift and capital gains taxes may apply differently. Confirm rules in both the donor’s and recipient’s states.
-
Undervaluing the property: Incorrect valuation can trigger IRS challenges and penalties. Use qualified appraisers for substantial gifts.
Practical checklist before gifting real estate
- Gather documents: deed, purchase settlement statements, recorded improvements, prior tax returns showing depreciation.
- Obtain a qualified appraisal for FMV (especially for Form 709 or charitable deductions).
- Consult a CPA and an estate planning attorney to model gift vs. bequest scenarios and to confirm filing requirements and tax exposure.
- Prepare Form 709 if the gift exceeds the annual exclusion, and retain copies of appraisals and supporting records.
- If donating to charity, confirm the charity’s ability to accept real estate and discuss sale and stewardship plans.
Example scenario (numbers for illustration)
- Donor bought an investment property years ago for $150,000 (adjusted basis after improvements). Today the property’s FMV is $400,000. Donor gifts the property to an adult child.
- Donor: No immediate capital gains tax, but the value of the gift may require filing Form 709 if it exceeds the annual exclusion in the year of the gift.
- Recipient: Basis is $150,000. If the child later sells for $420,000, their long-term capital gain is $270,000 (subject to capital gains rates and NIIT if applicable).
When to get professional help
In my practice I advise clients to involve a CPA and estate planning attorney before gifting real estate. The right advisors will: model tax outcomes, prepare Form 709 properly, coordinate appraisal timing, evaluate state tax issues, and set up charitable vehicles if desired.
Authoritative resources and further reading
- IRS — Gift Tax (overview and rules): https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax
- IRS — Publication 551, Basis of Assets: https://www.irs.gov/publications/p551
- IRS — Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return: https://www.irs.gov/forms-pubs/about-form-709
- IRS — Topic No. 409, Capital Gains and Losses: https://www.irs.gov/taxtopics/tc409
- IRS — Net Investment Income Tax (NIIT): https://www.irs.gov/individuals/net-investment-income-tax
Disclaimer
This is educational content and not personalized tax or legal advice. Tax laws and dollar limits change. Consult a qualified CPA and estate attorney to apply these ideas to your situation.
