The act of gifting is a generous and meaningful practice that many investors or property owners engage in. Some gift for estate planning purposes, while others do it to pass down family businesses or homes to the next generation. However, this act does prompt givers and receivers to ask questions, such as whether or not capital gains taxes apply when gifting a real estate asset.
The answer is no. However, down the line, the recipient may need to pay capital gains taxes if they conduct certain types of transactions. Understanding how tax liability applies in the future is helpful to ensure that receivers won’t get any unexpected surprises down the line. Below, Realized 1013 shares all you need to know about capital gains tax on gifted property. Let’s take a closer look.
On the Giver’s Side
For givers who are gifting a real estate asset, you won’t need to pay capital gains taxes at the time of gifting. This benefit applies even to highly appreciated properties. In general, the IRS only recognizes gains or losses during a sale, and gifting isn’t categorized as such.
What you need to be aware of is the federal gift tax. As of 2025, the current annual limit is $19,000 per recipient. If your gift exceeds that amount, you’ll need to file IRS Form 709 to report it. Most real estate properties would be above the annual value. As such, you will instead follow the lifetime exemption limit, which is $13,990,000 today. Giving away property in excess of this amount will result in federal gift tax liability.
On the Receiver’s Side
Beneficiaries of real estate gifts also won’t need to pay any capital gains taxes immediately. However, those who have plans to sell the asset in the future will need to consider their tax situation. The key factor here is the cost basis of the property, which is the original purchase price and doesn’t include any appreciation. Gifting results in a carryover basis, meaning the original cost basis remains the same even though there is a new asset owner.
Carryover basis also means that any appreciation on the property will become yours, too. If you plan to sell the property later at a profit, then the appreciated amount becomes the capital gain. For highly appreciated properties, the capital gain taxes can be substantial.
When Do Capital Gains Become Taxable? Example Scenario
John gifted a $1.5 million apartment complex to his son, Mark, who knows how to manage the building's operations. Previously, John acquired the property for $1 million. This value serves as the cost basis, while the remaining $500,000 is the appreciated amount. If Mark decides to sell the asset, he will have $500,000 in capital gains plus any appreciation during his time as owner.
Assuming that Mark is in the highest tax bracket, he will need to pay 20% of the capital gains as tax. He may need to pay the IRS upwards of $100,000, which is not a small amount. As such, many investors who’ve been gifted assets look for ways to defer capital gains tax payments as part of their tax management strategy.
Ways To Defer Capital Gains Tax on Gifted Property
If you have plans to sell the gifted asset for whatever reason, there are ways to delay capital gains taxes and keep more of your money working for you.
- 1031 Exchanges: The like-kind swap or 1031 exchange involves two properties that have been held for business or investment use. The apartment complex in our example qualifies for such a transaction. When done according to IRS rules, a 1031 exchange allows you to defer capital gains taxes as you acquire a new replacement property.
- Delaware Statutory Trusts (DST): A 1031 exchange can be finished using a DST, which is an investment vehicle that owns underlying properties. The proceeds from your property sale can be used to purchase DST fractional interests while also deferring capital gains taxes. Beyond delaying tax liability, DSTs offer truly passive income and improved diversification.
- Installment Sales: Through an installment sale, you receive income from your property sale in yearly increments. This structure also means that you won’t need to pay capital gains taxes in one lump sum but in smaller, more manageable amounts.
- Charitable Remainder Trusts: A Charitable Remainder Trust (CRT) allows you to donate the gifted property to a trust, receive income for a set period, and eventually benefit a charity. You can defer capital gains taxes on the sale, reduce your taxable estate, and even claim a charitable deduction.
Summing Up: What You Need To Know About Gifted Property Capital Gains Tax
Gifting a real estate property doesn’t lead to capital gains taxes for both the giver and receiver. However, the basis carries over. If the receiver does try to sell the property later, then they will be liable to pay capital gains taxes, especially if the asset is highly appreciated. Capital gains tax deferral strategies become necessary to avoid getting a huge tax hit and keep your wealth preserved.
Sources:
https://www.irs.gov/pub/irs-news/fs-08-18.pdf
https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates
https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax
