Gift Now or Inherit Later: Basis and Tax When Children Receive Real Estate

The basis rule is the whole decision for most families

Publication 551 gives the gift rule: if the property is worth at least the donor's adjusted basis, the recipient's basis is the donor's adjusted basis, increased by the share of any gift tax paid that relates to the appreciation. If the property is worth less than the donor's basis, the recipient uses the lower value to measure a loss, so a gift of property with a built-in loss throws the loss away.

Inherited property is different. Section 1014 sets basis at fair market value on the date of death, and the step-up in basis page covers the details, including joint ownership and trusts. Section 1250(d) excludes both gifts and transfers at death from recapture, but only the transfer at death also resets basis.

That means a gift defers your gain to your children, while an inheritance erases it. The depreciation recapture on gifted property page shows how the depreciation you claimed is taxed in their hands.

Transfer tax rarely tips the balance in 2026

Rev. Proc. 2025-32 sets the 2026 annual gift exclusion at $19,000 per recipient and the basic exclusion amount at $15,000,000, the figure Public Law 119-21 wrote into section 2010(c), indexed for inflation after 2026. A gift above $19,000 to one person uses part of the lifetime amount and requires a gift tax return under section 6019.

The Form 709 instructions say the return is due by April 15 of the year after the gift and that the gift must be adequately disclosed, with a qualified appraisal or a detailed description of the valuation method, to start the statute of limitations. Deeding a building is a gift of its full equity, so a return is almost always required.

Gifting removes future appreciation from your estate. That matters when an estate is above the exclusion or when a state estate tax applies at a lower threshold, as the portability page explains. Below those levels, a gift saves no transfer tax and costs the step-up.

A worked example: land worth $900,000 with a $100,000 basis

Hypothetical, round numbers. A parent owns investment land bought for $100,000 and now worth $900,000. There is no depreciation on land, which keeps the comparison simple.

If the parent gives the land to a child and the child sells it for $900,000, the child's basis is $100,000 and the gain is $800,000. Even at 15 percent that would be $120,000, and a gain that size pushes most of it past the $613,700 joint threshold into the 20 percent rate, so with the 3.8 percent net investment income tax the bill approaches $190,000. The gift itself uses $881,000 of the parent's lifetime exclusion after the $19,000 annual exclusion, and no gift tax is paid.

If the parent keeps the land and the child inherits it at $900,000, the child's basis is $900,000 and a sale at that price produces no gain. The estate is well under $15,000,000, so no estate tax is due. Run your own numbers with your CPA; a child with low income might sell part of the gain in the 0 percent band, which in 2026 runs to $98,900 of taxable income on a joint return and $49,450 single.

Control, timing and the gift-back trap

A gift is complete and irrevocable. You give up the rent, the say over a sale or refinance, and the asset's protection from your children's creditors and divorces. Many owners who want the step-up but not the management keep the property and simplify it instead, for example by exchanging into Delaware statutory trust interests that can be divided among heirs at death; DSTs in estate planning covers that use.

Section 1014(e) blocks one shortcut. If you give appreciated property to someone who dies within one year and it passes back to you or your spouse, your basis is the decedent's adjusted basis, not the date-of-death value. Publication 551 states the same rule.

A donee does keep useful attributes. Under section 1223(2) the donor's holding period tacks, and the donee can do a 1031 exchange of property held for investment. If you exchanged recently, read gifting replacement property after a 1031 first.

When a gift is still the better choice

Gifting makes sense when the property has a high basis relative to value, so little step-up is lost, or when you expect large appreciation and your estate will exceed the exclusion. It can also fit when the child will hold for life, so the carryover basis may itself be stepped up at the child's death.

If the goal is income for a parent and a clean inheritance for children, an exchange into passive real estate keeps the deferral alive until the step-up. The traditional DST exchange solutions describe that structure.