The short answer
Your basis is the donor's adjusted basis on the day of the gift, carried over to you under section 1015, not the property's value then. That figure already reflects every dollar of depreciation the donor claimed, and that depreciation comes back as recapture when you sell. It is increased only by the part of any gift tax paid that relates to the appreciation. If the property was worth less than the donor's basis at the gift, you also have a second, lower basis that applies only when you sell at a loss.
At a glance
| Gain basis | Donor's adjusted basis at the gift, adjusted for your own depreciation and improvements |
|---|---|
| Donor's depreciation | Already subtracted from your basis and recaptured when you sell |
| Gift tax adjustment | Gift tax paid times net appreciation divided by the taxable gift |
| Loss basis | Fair market value at the gift, if lower than the donor's basis |
| Holding period | Includes the donor's holding period |
| Part gift, part sale | The greater of what you paid or the donor's basis |
| 2026 gift figures | $19,000 annual exclusion; $15,000,000 basic exclusion amount |
You step into the donor's basis, including the depreciation they already took
Section 1015(a) says the basis of property acquired by gift is the same as it would be in the hands of the donor. Publication 551 puts it as the donor's adjusted basis just before the gift, so you need three numbers: that adjusted basis, the fair market value at the gift date and any gift tax paid.
Adjusted basis means the donor's cost plus improvements, minus every dollar of depreciation they were allowed or allowable. A parent who bought a rental decades ago and depreciated the building for most of that time may hand over a basis close to the land value.
From the day of the gift you keep adjusting: add your own improvements and subtract your own depreciation. How to rebuild that figure from old records is covered in how to calculate the adjusted basis of a rental.
The donor's depreciation is recaptured on your sale, not erased by the gift
A gift is not a sale, so the donor recognizes no recapture: Reg. section 1.1250-3(a) states that section 1250(d)(1) recognizes no gain on a disposition by gift. The same regulation carries the donor's additional depreciation over to the donee, and the donor's holding period goes with it.
For the 25% layer, section 1250(b)(3) counts depreciation allowed or allowable "to the taxpayer or to any other person" that is reflected in the property's adjusted basis. Because a gift carries the donor's basis over, the donor's depreciation is part of your unrecaptured section 1250 gain when you sell.
This is the sharpest difference from an inheritance, where section 1014 resets basis to fair market value at death and the prior depreciation drops out. That route is covered in inherited rental 1031 options.
Gift tax paid adds a slice of basis, and a lower value at the gift creates a separate loss basis
For gifts after 1976, section 1015(d)(6) adds only the part of the gift tax paid that bears the same ratio to the tax as the net appreciation bears to the amount of the gift. Net appreciation is fair market value minus the donor's adjusted basis. With a 2026 annual exclusion of $19,000 and a basic exclusion amount of $15,000,000 under Rev. Proc. 2025-32, most donors file a gift tax return but pay no tax, so this adjustment is often zero.
If the property was worth less than the donor's adjusted basis on the gift date, section 1015(a) uses that lower value as your basis for figuring a loss. The donor's basis still governs gain. A sale price between the two produces neither gain nor loss, as the example in Reg. section 1.1015-1 shows.
If you paid something for the property, Reg. section 1.1015-4 gives you the greater of what you paid or the donor's adjusted basis, plus any allowable gift tax increase.
Worked example: a $100,000 basis on a $500,000 gift
Hypothetical, round numbers; run your own numbers with your CPA. A parent bought a rental for $200,000, claimed $100,000 of depreciation and gave it to you in 2026 when it was worth $500,000. The parent filed a gift tax return, used part of the lifetime exclusion and paid no gift tax.
Your basis is $100,000, not $500,000. You rent it for two years, claim $10,000 more depreciation and sell for $520,000. Your adjusted basis is $90,000, your gain is $430,000, and $110,000 of it is unrecaptured section 1250 gain taxed at up to 25%: the parent's $100,000 plus your $10,000.
Had you inherited the same property at $500,000, the gain would be $30,000 and the recapture layer only your own $10,000. That gap is why families weigh a lifetime gift against holding for the step-up.
Exchanging a gifted rental moves the low basis into the replacement
You can exchange a gifted rental like any other investment property, but the carryover basis follows you. Under section 1031(d) the replacement takes the relinquished property's basis, adjusted for boot and added cash, as set out in basis in replacement property after a 1031.
Hold the property as a rental before selling. An exchange right after a gift raises the question of whether you ever held it for investment yourself, which is covered in how long to hold before a 1031.
If the reason to sell is to stop managing it, a Delaware Statutory Trust interest is replacement real estate that carries the same deferred gain.
Related questions
What if I cannot find the donor's purchase records?
Reg. section 1.1015-1(a)(3) has the IRS try to obtain the facts from the donor or others. If that proves impossible, the donor's basis is the fair market value the IRS finds as of about the date the donor acquired the property.
Does my holding period start on the date of the gift?
No. Under section 1223, when your basis is figured from the donor's, the donor's holding period is included, so a sale soon after the gift can still be long-term.
What basis do I depreciate if the parent lived in the home and I rent it out?
Publication 551 sets the depreciable basis of property changed to rental use at the lesser of fair market value or adjusted basis on the conversion date, so a decline in value can lower your depreciation.
Is a gift from my spouse treated the same way?
Transfers between spouses fall under a separate rule, section 1041, which Publication 551 discusses apart from gifts. Ask your CPA which applies before figuring basis.
Can I give the property to my child after I exchange into it?
You can, but timing matters for the holding requirement on the replacement. See gifting replacement property after a 1031.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S.C. section 1015, basis of property acquired by gift (Cornell LII)
- 26 CFR section 1.1015-1, property acquired by gift (Cornell LII)
- 26 CFR section 1.1015-4, transfers in part a gift and in part a sale (Cornell LII)
- 26 CFR section 1.1250-3, exceptions and limitations, gifts (Cornell LII)
- 26 U.S.C. section 1250, gain from dispositions of certain depreciable realty (Cornell LII)
- 26 U.S.C. section 1223, holding period of property (Cornell LII)
- IRS, Publication 551, Basis of Assets
- IRS, Rev. Proc. 2025-32, 2026 inflation adjustments
- 26 U.S.C. section 1014, basis of property acquired from a decedent (Cornell LII)