Managing Basis and Lots in Family-Transfer Transactions

Why this matters

When assets move between family members—by gift, sale, or at death—the tax consequences depend on the “basis” the recipient inherits and which “lots” of an asset are involved. Basis determines taxable gain or loss when the asset is sold. Mistakes or missing records can cause beneficiaries to overpay capital gains tax, or to miss opportunities to reduce taxes through lot selection and timing.

This article explains the core rules, gives practical examples, and provides a step-by-step checklist you can use when transferring investments or real estate inside a family. The guidance below is educational; consult a tax professional for personalized advice.

Sources: IRS Publication 551 (Basis of Assets) and related IRS guidance on gifts, estates, and broker reporting (see citations inline).

Key rules you need to know

• Gifted property: The recipient generally takes the donor’s adjusted basis (“carryover basis”). The donor’s holding period also carries over for determining short- or long-term capital gain. If the donor paid gift tax on a gift of appreciated property, a portion of that gift tax may increase the recipient’s basis (IRS Publication 551).

• Inherited property: The recipient usually receives a “stepped-up” (or in some cases “stepped-down”) basis to the fair market value (FMV) on the date of death or alternate valuation date used for the estate (IRS guidance on basis of inherited property).

• Spousal transfers: Transfers between spouses (who are both U.S. citizens) generally receive carryover basis and are tax-free at transfer due to the marital deduction; special rules apply for transfers incident to divorce and for nonresident aliens.

• Community-property states: In many community-property jurisdictions, both halves of community property may receive a step-up in basis when one spouse dies — an important exception to general step-up rules that can produce significant tax savings.

• Lots and specific identification: When an investment (stocks, mutual funds, crypto, etc.) was acquired in multiple purchases, each purchase is a separate “lot” with its own basis and holding period. You can usually choose which lots to sell if you use specific identification and keep clear records; otherwise, brokers may apply FIFO (first-in, first-out) or their default method.

• Broker reporting and Form 1099-B: Brokers normally report cost basis for covered securities on Form 1099-B and to the IRS. For family transfers that change basis, reconcile broker-reported basis with your own records and file Form 8949/Schedule D as needed.

(Primary authoritative reference: IRS Publication 551 — Basis of Assets; see IRS pages for broker reporting and estate/gift guidance.)

Practical examples

1) Inherited home (stepped-up basis)

• Parents bought a house in 1990 for $100,000; its FMV at their death is $300,000. Under stepped-up-basis rules, the heir’s basis becomes $300,000. If the heir later sells for $350,000, the taxable gain is $50,000 (ignoring selling costs and exclusions).

2) Gifted stock (carryover basis)

• Donor bought 100 shares at $10/share and 100 shares at $40/share (two lots). Donor gifts 150 shares to a child. The child inherits the donor’s basis for the specific shares transferred. If the child sells shares and uses specific identification to sell the higher-basis lots first, the taxable gain can be minimized.

3) Gift tax paid on appreciated property

• Donor gives highly appreciated real estate and pays gift tax because the gift exceeds exclusions. A portion of the gift tax can increase the recipient’s basis in the property. This is a subtle rule—work with a tax advisor to calculate the adjustment.

Step-by-step checklist for family transfers

1. Inventory assets and lots. Create a spreadsheet showing purchase dates, cost basis, acquisition amounts, and lot IDs. For real estate, include original purchase price, improvements, and closing costs that adjust basis.
2. Gather supporting documents. Collect broker statements, trade confirmations, settlement statements, receipts for improvements, and prior tax-return schedules showing gains or losses.
3. Confirm transfer type. Was it a gift, sale, transfer between spouses, or a transfer at death? The type determines whether basis carries over or is stepped up.
4. Talk to the broker or custodian. For securities, ensure the broker records the correct basis and is prepared to accept specific-lot sell instructions when shares are later sold.
5. Decide lot strategy for taxable events. If you control the sale timing after the transfer, plan which lots to sell (specific ID vs. FIFO) to manage short- vs. long-term gains.
6. File any required returns. Large gifts may require Form 709 (gift tax return). Sales of assets must be reported on Form 8949 and Schedule D. If basis corrections are needed from past returns, consult the IRS guidance for amending returns.
7. Document the transfer. For gifts, note the transfer date, the donor’s basis, and any gift tax paid. For inherited assets, document the FMV used to establish stepped-up basis (appraisals or estate documents are useful).
8. Revisit estate plans. For older clients or large holdings, coordinate gifting strategies with estate planning goals—sometimes a lifetime gift is smart, other times preserving step-up on death is more tax-efficient.

How lot identification works in practice

• Specific-identification method: To sell specific lots, you must inform the broker at the time of sale which lot(s) you are selling and keep contemporaneous records. Many brokers provide an online sell interface that accepts lot-selection instructions.

• Default methods: If you do not specify, brokers may use FIFO or their default accounting method. That can produce less favorable tax results.

• Mutual funds and ETFs: Brokerage platforms often let you pick lots for funds and ETFs as well; check your broker’s requirements and reporting.

• Cryptocurrency: Tax treatment depends on whether you can identify specific units and whether your exchange or custodian supports lot-level reporting. See our guide on cryptocurrency cost basis for specific pitfalls.

For more on timing those sales and how step-up rules interact with capital gain harvesting, see our piece on Timing Capital Gains: Harvesting, Losses, and Step-Up Basis.

Common mistakes and how to avoid them

• Losing original records: Keep trade confirmations and closing statements for as long as you own the asset and for at least three years after sale.
• Assuming stepped-up basis applies to gifts: It does not—gifts generally retain donor’s basis.
• Letting the broker default to FIFO: Specify lots when you want a particular tax outcome.
• Failing to reconcile 1099-B: When a broker reports a basis that differs from your records (common after intra-family transfers), resolve discrepancies before filing.

For best practices on tracking cost basis across investments and real estate, see our guide: Best Practices for Tracking Cost Basis on Investments and Real Estate.

When rules get trickier (and you should get help)

• Partial gifts or split-interest transfers (e.g., retained life estate) change basis calculations.
• Transfers involving S corporation stock or partnership interests have additional basis rules tied to ownership and debt allocations.
• Correcting basis mistakes on prior returns can involve amended returns or even IRS relief procedures; see our article on Correcting Basis Errors on Previously Filed Returns for typical workflows.

If you encounter complex transfers, I routinely advise clients to involve both a tax CPA and an estate-planning attorney. In my practice, well-documented lot records and early coordination between financial, tax, and legal advisors prevent most downstream disputes and tax surprises.

Quick reference: What to tell your tax advisor

• Type of transfer (gift, sale, spouse transfer, inheritance) and transfer date
• Detailed lot list (dates, cost, quantity) and broker statements
• Copies of appraisals or estate inventories used to set FMV at death
• Notes on any gift tax paid and whether Form 709 was filed
• Any disagreement with broker-reported basis on Form 1099-B

Final thoughts

Managing basis and lots in family-transfer transactions is a technical but high-impact area of tax and estate planning. Small steps—organized records, clear lot selection, and coordination with advisors—can save hundreds of thousands of dollars for families with significant assets. Review transfers before they happen, and keep detailed documentation afterward.

Professional disclaimer: This article is educational and does not substitute for personalized tax or legal advice. For case-specific guidance, consult a tax advisor or estate attorney. Author experience noted is based on practice advising families and reviewing transfer documentation over many years.

Authoritative sources and IRS references

• IRS Publication 551, Basis of Assets: https://www.irs.gov/publications/p551
• IRS pages on broker reporting and Form 1099-B (see irs.gov)
• Consult current IRS guidance for gift, estate, and community property rules (information above is summarized and accurate as of 2025).