Basis of gifted property: carryover basis and gift tax

What you need to know about the gift

To figure the basis of property you receive as a gift, Publication 551 says you must know three things: its adjusted basis to the donor just before it was given to you, its fair market value when it was given to you, and any gift tax paid on it. If the donor gave you property that was already inside a trust, a separate section on property received from a trust applies instead.

Case one: value at the time of the gift is lower than the donor's basis

When fair market value is less than the donor's adjusted basis, your basis depends on whether you end up with a gain or a loss. For figuring a gain your basis is the donor's adjusted basis, plus or minus adjustments while you held the property. For figuring a loss your basis is the fair market value when you received the gift, adjusted the same way. If using the donor's basis for gain produces a loss, and using the fair market value for loss produces a gain, you have neither.

The publication's example: you receive an acre of land worth $8,000 when the donor's adjusted basis was $10,000. If you sell for $12,000 you have a $2,000 gain, using $10,000. If you sell for $7,000 you have a $1,000 loss, using $8,000. If the price is anywhere from $8,000 to $10,000, you have neither a gain nor a loss. At $9,000 the donor's basis would show a $1,000 loss while the fair market value would show a $1,000 gain, so the two cancel. If you hold the gift as business property, the basis for depreciation, depletion or amortization is the donor's adjusted basis, plus or minus adjustments.

Case two: value is at least the donor's basis

If the fair market value is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time of the gift, and you increase it by all or part of any gift tax paid, depending on the date of the gift. This is the carryover rule: the donor's built-in gain travels with the property, which differs from inherited property, where basis is generally reset to fair market value at death. Inherited property is covered by a different rule in the same publication.

Gift tax paid on a gift received before 1977

For gifts received before 1977, you add all of the gift tax paid to the donor's adjusted basis, but you cannot go above the fair market value of the gift when you received it. The publication gives two examples. A house given in 1976 had a fair market value of $21,000 and the donor's adjusted basis was $20,000. With $500 of gift tax, basis is $20,500. With $1,500 of gift tax the sum would be $21,500, so basis is limited to $21,000.

Gift tax paid on a gift received after 1976

For gifts after 1976, only the part of the gift tax due to the net increase in value is added. The net increase is the fair market value minus the donor's adjusted basis. The amount of the gift is its value for gift tax purposes after subtracting any annual exclusion and any marital or charitable deduction. You multiply the gift tax paid by a fraction: net increase in value over the amount of the gift.

The publication's 2025 example: a gift from your mother has a fair market value of $50,000 and her adjusted basis was $20,000. The annual exclusion was $19,000, so the amount of the gift is $31,000, and she paid $6,220 of gift tax. The net increase is $30,000, so the fraction is $30,000 over $31,000. The publication rounds the fraction to 0.97 and gets $6,033, then adds the $20,000 donor basis for a total of $26,033. Computing the fraction without rounding gives $6,019.35 and a basis of $26,019.35. The calculator shows both figures so you can match the publication or use the unrounded math; the difference is small, but check which method your tax software or preparer uses.

Adjustments while you hold it

In both cases the publication tells you to increase or decrease basis for required adjustments while you held the property, such as improvements, casualty losses and depreciation. The calculator above does not include these. Take the result as the starting basis on the date of the gift, then use the adjusted-basis page for later changes.

Why records are the practical problem

Most gifted-property problems come from missing records: donors rarely hand over their cost basis, the date of the gift, the value at that time, or whether a Form 709 was filed and gift tax paid. Ask the donor early. Without a documented donor basis, the sale price is the only number you can use, and the gain may be hard to support. The gift tax itself is explained in Publication 559, which the publication cites.

Sources

• IRS Publication 551, Basis of Assets (12/2025): Property Received as a Gift (FMV Less Than Donor's Adjusted Basis; FMV Equal to or More Than Donor's Adjusted Basis; Gift received before 1977; Gift received after 1976). Read November 2, 2026.

Edition read: Publication 551 (12/2025). The publication's example uses the 2025 annual exclusion of $19,000; check the current year's figure. This page summarizes the publication and does not replace it.