Depreciation Recapture on Gifted Property

The gift itself is tax-free for the donor, but the depreciation history transfers with the deed

Section 1250(d)(1) says the recapture rule of section 1250(a) does not apply to a disposition by gift, and section 1245(b)(1) says the same for personal property. Reg. section 1.1245-4(a) defines a gift for this purpose as a transfer where the recipient's basis is set by section 1015, the carryover basis rule.

The exception is a deferral, not a forgiveness. Section 1250(b)(3) defines depreciation adjustments as those reflected in adjusted basis on account of deductions allowed or allowable to the taxpayer or to any other person. Publication 544 gives the example directly: a parent gives a child section 1250 property with $500 of additional depreciation, the child claims $200 more, and at the child's sale the additional depreciation is $700.

Reg. section 1.1250-3(a)(3) adds that the donor's holding period counts for the recapture computation, and section 1223(2) tacks it for capital gain purposes, so a sale soon after the gift is still long-term if the donor held the property more than a year.

Your basis is the donor's basis, which is why the recapture survives

Publication 551 sets out the rule. If the property was worth at least the donor's adjusted basis at the time of the gift, your basis is the donor's adjusted basis. For gifts after 1976 you add the part of any gift tax paid that relates to the net increase in value, computed by multiplying the tax by the appreciation over the amount of the gift.

If the property was worth less than the donor's basis, you have two bases: the donor's basis for measuring gain, and the lower fair market value for measuring loss, with a sale between the two producing neither. For a rental held as business property, Publication 551 says your basis for depreciation is the donor's adjusted basis, adjusted while you hold it.

Because your starting basis already reflects every deduction the donor took, a donor who claimed 15 years of depreciation hands you a basis 15 years lower. If the donor skipped depreciation they were entitled to, section 1016(a)(2) still reduces basis by the allowable amount; the Form 3115 catch-up page covers fixing that before a sale.

A worked example: a rental given in 2021 and sold in 2026

Hypothetical, round numbers. A parent bought a rental house in 2006 for $300,000, with $240,000 allocated to the building, and claimed about $131,000 of straight-line depreciation through 2021. The parent's adjusted basis was then $169,000, and the house was worth $600,000 when it was given to you. No gift tax was due because the gift was covered by the parent's lifetime exclusion, so your basis is $169,000.

You rent it for five more years and claim about $40,000 of depreciation, leaving an adjusted basis of $129,000. You sell in 2026 for $700,000 with $40,000 of selling costs, an amount realized of $660,000 and a gain of $531,000. Of that, $171,000 is unrecaptured section 1250 gain, the parent's $131,000 plus your $40,000, taxed at up to 25 percent, about $42,750.

The remaining $360,000 is long-term capital gain. For a joint return with taxable income under $613,700, the 2026 top of the 15 percent bracket under Rev. Proc. 2025-32, that is about $54,000. If modified adjusted gross income exceeds $250,000, section 1411 can add 3.8 percent on the gain. Run your own numbers with your CPA; the actual depreciation schedules change every line.

Gifting at a bargain price or giving personal property triggers recapture sooner

A sale to a child for less than value is part sale and part gift. Reg. section 1.1245-4(a)(3) and Reg. section 1.1250-3(a)(2) say the donor recognizes recapture on the sale part, up to the gain on that part, and the child inherits only the depreciation the donor did not recognize. Publication 544 adds that no loss is allowed on a part-gift sale. The page on selling property to a family member covers the related-party exchange rules.

If the property had a cost segregation study or furnished units, the components classed as section 1245 property carry ordinary-income recapture rather than the 25 percent rate. Section 1245(a)(2) measures it with deductions allowed or allowable to the taxpayer or to any other person, so the donor's bonus depreciation on carpet or appliances becomes ordinary income in your hands; the section 1245 recapture page explains the split.

Where a 1031 exchange or waiting for a step-up changes the outcome

You can exchange gifted property like any other investment property. Section 1250(d)(4) limits recapture in a like-kind exchange to the gain recognized, so a fully deferred exchange carries the donor's depreciation and yours into the replacement property. Owners who no longer want to manage often use a Delaware statutory trust as the replacement; the traditional DST exchange page describes that route.

The bigger planning point is timing. Property that passes at death takes a fair market value basis under section 1014, and section 1250(d)(2) excludes transfers at death, so the depreciation history is wiped. With a 2026 basic exclusion amount of $15,000,000 under Rev. Proc. 2025-32, many families give up that reset by gifting early. The comparison is laid out in gift now or inherit later, and the inherited alternative in step-up in basis on real estate.