United States
Gifting a house vs inheriting one: how the tax basis changes everything
When someone inherits a house, the cost basis steps up to the fair market value at the date of death under Section 1014. When someone receives a house as a gift, the basis carries over from the donor under Section 1015. On a house originally bought for $150,000 and worth $550,000 at the time of transfer, selling later for $600,000 produces an estimated $7,500 in federal capital gains tax for an heir but $80,040 for a gift recipient, both filing single with $80,000 of other income. The difference is $72,540.
| Inherited basis (Section 1014) | Fair market value at date of death |
| Gift basis (Section 1015) | Donor's original cost (carryover) |
| Tax on inherited house sold for $600,000 | $7,500 |
| Tax on gifted house sold for $600,000 | $80,040 |
| Difference | $72,540 |
| Long-term rates | 0% / 15% / 20% |
How does the cost basis differ between a gift and an inheritance?
The cost basis is the starting figure subtracted from the sale price to measure the gain. It is the single variable that separates these two paths.
Inherited property (Section 1014). The basis resets to the fair market value on the date of the decedent's death. If a parent bought a house for $150,000 and it was worth $550,000 when they died, the heir's basis is $550,000. The $400,000 of appreciation during the parent's lifetime is never taxed.
Gifted property (Section 1015). The basis carries over from the donor. The same parent giving the house during their lifetime passes on a $150,000 basis, meaning the recipient eventually owes tax on the full $450,000 gain when selling for $600,000.
Side-by-side comparison at five sale prices
The table prices both paths for a house with a $150,000 original cost and a $550,000 value at the time of transfer, sold at five different prices. The seller files single with $80,000 of other taxable income.
| Sale price | Tax if inherited | Tax if gifted | Extra tax on gift |
|---|---|---|---|
| $500,000 | $0 | $61,240 | $61,240 |
| $550,000 | $0 | $70,640 | $70,640 |
| $600,000 | $7,500 | $80,040 | $72,540 |
| $700,000 | $23,640 | $103,065 | $79,425 |
| $800,000 | $42,440 | $126,865 | $84,425 |
Federal capital gains tax only, 2026. Assumes long-term holding, no selling costs, no Section 121 exclusion. State taxes are separate.
At every price point, the gifted property produces a larger gain because the basis is $400,000 lower. The gap narrows only in percentage terms as the sale price rises far above $550,000, because both paths then share the same post-transfer appreciation.
When the Net Investment Income Tax adds to the gap
The 3.8% Net Investment Income Tax applies to the lesser of net investment income or modified adjusted gross income above $200,000 for single filers. A larger gain from a gifted property pushes more income above that threshold.
For a single filer with $250,000 of other income selling at $600,000:
| Path | Gain | Estimated federal tax (incl. NIIT) |
|---|---|---|
| Inherited | $50,000 | $9,400 |
| Gifted | $450,000 | $92,325 |
Single filer, $250,000 other income, 2026. The difference is $82,925.
The NIIT does not apply below the threshold. For a lower-income seller, the gap between the two paths is still present but comes entirely from the long-term capital gains rates.
Can anything reduce the tax on a gifted property?
The carryover basis is not entirely fixed. Several adjustments can raise it:
- Capital improvements. Spending on permanent additions after receiving the gift raises the adjusted basis. Adding $30,000 of improvements to a $150,000 carryover basis brings the estimated tax on a $600,000 sale from $80,040 down to $74,400.
- Gift tax paid by the donor. If the donor paid federal gift tax on the transfer, a portion of that tax attributable to the appreciation is added to the recipient's basis under Section 1015(d).
- Section 121 exclusion. If the recipient lives in the house as a primary residence for at least two of the five years before selling, the first $250,000 of gain ($500,000 for married filing jointly) is excluded entirely.
- Selling costs. Agent commissions, transfer taxes and legal fees reduce the amount realized, shrinking the gain.
None of these changes the fundamental gap created by the carryover basis itself. They reduce the tax on the gift path, but the inheritance path starts from a higher basis to begin with.
When might a gift still be the right transfer?
The stepped-up basis makes inheritance more favorable for capital gains tax in nearly every case. But capital gains tax is not the only consideration:
- Estate tax exposure. For very large estates above the federal exemption, removing an asset during life can reduce the estate tax. The trade-off is a higher capital gains tax for the recipient, and whether that exchange is worthwhile depends on the numbers.
- Timing and control. A gift transfers ownership now. An inheritance requires waiting for a death, and the property passes through probate unless held in a trust.
- Little appreciation. When the property has not risen much above its original cost, the basis gap is small and the tax difference is minor.
- Recipient will use it as a primary home. If the recipient moves in and qualifies for the Section 121 exclusion, the carryover basis matters less because the first $250,000 of gain is excluded anyway.
These are planning questions that depend on the full financial picture, not just the capital gains calculation. The figures here show what the capital gains tax difference is; whether a gift is still preferable overall is a question for a tax adviser who can see the whole estate.
Run your own numbers with the US property capital gains calculator
Common questions
Do you pay capital gains tax on a gifted house?
Not when the gift is received. Capital gains tax arises when the recipient later sells the house, and the gain is measured from the donor's original cost (the carryover basis) rather than from the property's value at the time of the gift. On a house originally bought for $150,000 and sold for $600,000, the estimated federal tax for a single filer with $80,000 of other income is $80,040.
What is the difference between stepped-up basis and carryover basis?
A stepped-up basis resets the cost to the fair market value at the date of death, eliminating all prior appreciation from the capital gains calculation. A carryover basis keeps the donor's original purchase price, so the full appreciation from the original purchase date onward is taxable when the property is sold. Section 1014 governs stepped-up basis for inherited property, and Section 1015 governs carryover basis for gifts.
How much more tax does a gift recipient pay compared to an heir?
On a house bought for $150,000, worth $550,000 at the time of transfer, and sold for $600,000, the gift recipient pays an estimated $72,540 more in federal capital gains tax than an heir, both filing single with $80,000 of other income. The gap comes from the $400,000 of appreciation embedded in the carryover basis.
Does the Section 121 exclusion apply to a gifted house?
Yes, if the recipient lives in the house as a primary residence for at least two of the five years before selling. The exclusion removes up to $250,000 of gain for a single filer or $500,000 for married filing jointly. This can entirely eliminate the tax on a gifted property with moderate appreciation.
Is gift tax the same as capital gains tax on a gift?
They are separate taxes. Gift tax, if any, is paid by the donor at the time of the gift and applies only when the value exceeds the annual exclusion and lifetime exemption. Capital gains tax is paid by the recipient when the property is eventually sold and is based on the gain above the carryover basis. Paying gift tax does not reduce the capital gains tax, though a portion of the gift tax may be added to the recipient's basis under Section 1015(d).
What happens to the basis if you gift a house that has lost value?
When the fair market value at the time of the gift is lower than the donor's basis, the rules split. For computing a gain, the recipient uses the donor's higher basis. For computing a loss, the recipient uses the lower fair market value. If the eventual sale price falls between the two figures, there is neither gain nor loss. This "double basis" rule under Section 1015 prevents taxpayers from manufacturing losses through gifts.
This is an estimate for general information only, not tax, legal or financial advice. Tax rules are complex and depend on your circumstances, and figures may not reflect the latest changes. Confirm your position with Internal Revenue Service (IRS) or a qualified tax adviser before acting. The terms of use set out the limits of this estimate and of our liability.
Your figures are worked out in your browser. They are not sent to us or stored.