Selling or Gifting a Rental to Your Child: US Tax Rules

A sale, a gift and a discounted sale each put the tax on a different return

A sale to your child at fair market value is taxed like a sale to a stranger. You report the price less your adjusted basis, the depreciation you claimed comes back first as unrecaptured section 1250 gain at up to 25 percent, and the rest is long-term capital gain. Your child starts with a cost basis equal to the price and a fresh depreciation schedule.

An outright gift is not a disposition for recapture. Section 1250(d)(1) says subsection (a) does not apply to a disposition by gift, and Reg. section 1.1250-3(a) restates it. You owe no income tax in the year of the gift, but nothing is forgiven: the gain and the recapture travel with the deed.

A sale below value is both at once. Reg. section 1.1001-1(e) treats the transfer as a sale to the extent of the price and a gift of the rest; its first example is a parent selling property with a $30,000 basis and a $90,000 value to a son for $60,000, a $30,000 gain and a $30,000 gift. The pricing mechanics are on selling a rental to a family member below market; this page is about choosing a route.

Carryover basis under section 1015 against a step-up under section 1014 decides it, and the recapture travels with the basis

Section 1015(a) gives a donee the same basis the property had in the donor's hands: your purchase price plus improvements minus every dollar of depreciation allowed or allowable, which after decades of depreciation can be close to land value. The one adjustment, in section 1015(d)(6), adds the slice of any gift tax actually paid that relates to the appreciation, and most donors pay none.

Section 1014(a) does the opposite for property acquired from a decedent: basis becomes fair market value at the date of death and the depreciation history disappears with it. Section 1014(e) closes one loop: appreciated property you gave to someone who dies within a year and leaves it back to you keeps the old basis.

The choice is therefore timing. Deed it now and the family pays the built-in tax at your child's sale; hold it and the gain is never taxed on either return. Gift now or inherit later works through when a lifetime gift still wins, and what basis a gifted rental carries covers the child's side.

The recapture rides along too. Section 1250(b)(3) counts depreciation allowed or allowable to the taxpayer or to any other person, as long as it is reflected in adjusted basis, so your depreciation sits inside your child's carried-over basis and is taxed as theirs at the sale. Reg. section 1.1250-3(a)(3) carries the donor's additional depreciation and holding period over to the donee.

A gift does not reduce the recapture; it moves it to another return. Depreciation recapture on gifted property runs the math for the recipient.

Form 709 reports the gift, and in 2026 the exclusion figures mean tax is rarely paid

Rev. Proc. 2025-32, section 3.42, sets the 2026 annual exclusion at $19,000 of present-interest gifts to any one person. Section 3.14 of the same procedure records the basic exclusion amount at $15,000,000 for calendar year 2026, raised by Public Law 119-21, with inflation indexing resuming in 2027.

The Form 709 instructions require a return for a gift to any one donee above the annual exclusion, and for any gift that spouses elect to split, whatever the amount. The return is due April 15 of the year after the gift. Adequate disclosure, which starts the statute of limitations, means a qualified appraisal or a detailed description of how value was set, plus the parcel's legal description.

Gift tax is owed only once cumulative taxable gifts pass the basic exclusion amount, so the usual outcome is a return, no tax and a smaller exclusion left for the estate. On a discounted sale the same return reports the discount, and Reg. section 1.1015-4 fixes your child's basis at the greater of the price paid or your adjusted basis, plus any gift tax adjustment.

Worked example: a $700,000 rental with a $250,000 adjusted basis, three ways

Hypothetical, round figures. You bought a rental for $400,000, claimed $150,000 of depreciation, and it now appraises at $700,000. Your adjusted basis is $250,000 and your child wants it.

Sold at $700,000, you recognize $450,000 of gain in 2026: $150,000 of unrecaptured section 1250 gain at up to 25 percent and $300,000 of long-term capital gain. Your child's basis is $700,000. Gifted outright, you report a $681,000 taxable gift on Form 709 after the $19,000 exclusion, pay nothing, and your child's basis is $250,000. If they take $25,000 more depreciation and sell for $800,000, their gain is $575,000, and $175,000 of it is the recapture layer, yours plus theirs.

Sold to your child for $400,000, you have $150,000 of gain, all of it in the recapture layer because that layer is capped at the depreciation claimed, and a $300,000 gift. Your child's basis is $400,000, the greater of the price and your basis. The part sale pulls the 25-percent layer onto your return while the capital gain carries over. Which split fits depends on both families' brackets, so test each route with your CPA before pricing the deed.

If either of you exchanges, the related-party rules in sections 1031(f) and 267 apply

Parents and children are related persons: section 267(b)(1) lists members of a family, and section 267(c)(4) defines family as brothers and sisters, spouse, ancestors and lineal descendants. Section 267(a)(1) disallows any loss on a sale between you. Section 1031(f) uses the same list: when you and your child exchange properties with each other, either side disposing of what it received within two years recognizes the deferred gain unless one of the exceptions in section 1031(f)(2) applies, and section 1031(f)(4) reaches arrangements built around the rule.

A plain cash sale to your child while you buy replacement property from a stranger is a different transaction, discussed on selling to a family member and still exchanging. If instead you carry a note for your child, section 453(e) treats their resale within two years as a payment to you, so the installment deferral collapses if they flip it.

When the parent should exchange instead of deeding the rental to the child

Many parents asking this question want to stop managing a building and keep the value in the family, not hand the building over. A section 1031 exchange into fractional interests in a Delaware statutory trust defers the whole gain and the recapture, removes the landlord work, and leaves an interest that passes at your death with the section 1014 step-up, as DSTs in estate planning explains.

That route has its own risks: a trust interest cannot be sold on demand, the real estate and the debt on it can lose value, and the principal is not guaranteed. Compare the paths on exchanging now versus holding for the step-up before choosing between a deed, a note and an exchange.