The short answer
Carryover basis is a basis taken from someone else's or some other property's basis rather than from what you paid, so the gain built up before the transfer is preserved instead of taxed or erased. The two cases investors meet are a gift, where section 1015 gives you the donor's basis, and a 1031 exchange, where section 1031(d) carries the relinquished property's basis into the replacement. Inherited property is the contrast: section 1014 resets basis to fair market value at death.
At a glance
| Gift | Donor's adjusted basis, plus part of any gift tax paid on appreciation |
|---|---|
| Gift at a loss | Fair market value at the gift is the basis for figuring a loss |
| Exchange | Old basis, less money received, plus gain recognized; added cash becomes excess basis |
| Inheritance | Fair market value at the date of death, not a carryover |
The Code calls it transferred or exchanged basis, and the IRS uses carryover basis for both
Section 7701(a)(43) defines transferred basis property as property whose basis is set by reference to the basis in the hands of a donor or other transferor, and section 7701(a)(44) defines exchanged basis property as property whose basis is set by reference to other property you held. IRS Publication 946 calls the basis you take in a nontaxable exchange the carryover basis.
For gifts, section 1015(a) gives the donee the donor's basis, except that if the donor's basis exceeds fair market value at the gift, fair market value is used for figuring a loss. Section 1015(d)(6) adds only the share of gift tax attributable to the gift's net appreciation for gifts after 1976.
For exchanges, section 1031(d) sets the replacement's basis at the old basis, decreased by money received and increased by gain recognized. Under section 1223, the holding period tacks in both cases, as Publication 544 explains.
Worked example: the same rental gifted, exchanged and inherited
Hypothetical: a parent owns a rental worth $800,000 with an adjusted basis of $200,000. If the parent gifts it, the child's basis is $200,000 and a later sale at $800,000 produces $600,000 of gain, plus recapture of the depreciation the parent claimed, which Publication 544 says follows carryover basis property.
If the parent exchanges it for a $1,000,000 replacement, adding $200,000 of cash, the new basis is $400,000: $200,000 carried over plus $200,000 of excess basis. Publication 551 uses the same split in its own example.
If the parent holds either property until death, the heir's basis becomes fair market value under section 1014, and the deferred gain is never taxed. Run your own numbers with your CPA.
Where it bites: lifetime gifts of low-basis property and depreciation on exchanged basis
Gifting a long-held rental passes the whole deferred gain to the recipient, which is why gift versus inheritance is usually a basis decision. The child's basis in a gifted rental also controls their depreciation.
Gifts of property that has fallen in value carry a trap of their own. Publication 551 shows land with a $10,000 donor basis and an $8,000 value at the gift: the recipient uses $10,000 to figure gain and $8,000 to figure loss, so any sale between those prices produces neither gain nor loss, and the drop in value that happened while the donor owned it can never be deducted by the recipient.
In an exchange, Publication 946 says the carryover basis keeps depreciating over the old property's remaining recovery period and method, while excess basis is treated as newly placed in service; see depreciating replacement property. A step-up at death on 1031 property is what ends the chain.
Related questions
Is carryover basis the same as substituted basis?
Close. Section 7701(a)(42) defines substituted basis property as either transferred basis property, such as a gift, or exchanged basis property, such as a 1031 replacement. Carryover basis is the everyday name for both.
Does gift tax paid raise the recipient's basis?
Partly. For gifts after 1976, section 1015(d)(6) adds only the portion of the gift tax attributable to net appreciation, the amount by which fair market value exceeded the donor's basis.
Can I get a step-up on property I received in a 1031 exchange?
Yes, at death. Section 1014 gives the heir fair market value basis regardless of how the decedent acquired the property, which removes the gain deferred through prior exchanges.
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.