When you receive real estate as a gift, you inherit the donor’s tax problem along with the deed. IRC Section 1015 locks your basis to whatever basis the donor held — no reset, no step-up, no relief from years of accumulated depreciation.
What Basis Means Before We Go Further
Every piece of real property you own carries a basis — a number that determines your gain when you eventually sell. For purchased property, IRC Section 1012 sets that number at cost: what you paid, plus acquisition costs, plus improvements, minus depreciation claimed over time. A duplex purchased for $285,000 with $10,000 in closing costs starts at a $295,000 basis. Add $30,000 in improvements and it reaches $325,000. Claim five years of depreciation at $10,000 per year and the basis falls to $275,000. That figure — not the current market value — is what determines your taxable gain on a sale.
Section 1015: Carryover Basis Is the Rule for Gifts
IRC Section 1015, “Basis of Property Acquired by Gifts and Transfers in Trust,” states that if property was acquired by gift, “the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift.” The statute goes on to add one narrow exception: if the donor’s basis exceeds fair market value at the time of the gift, the recipient uses fair market value — but only for determining a loss, not a gain.
In plain terms, the recipient steps into the donor’s shoes. If the donor bought a building decades ago, claimed years of depreciation, and now holds a basis far below market value, the person who receives that building as a gift carries the same beaten-down basis forward. The gift transfers both the asset and the embedded tax liability. Property worth $900,000 with a donor basis of $175,000 means the recipient faces a $725,000 gain the moment they sell — regardless of what they paid for the gift, which was nothing.
This is sometimes called “carryover basis” or “transferred basis.” The “transferred basis” is not entirely precise terminology in tax usage, but the concept is clear: basis does not reset at the moment of the gift.
Section 1014: The Step-Up That Gifted Property Does Not Get
IRC Section 1014 — the provision that turns “tax-deferred” into “tax-free” — applies exclusively to inherited property. It provides that the basis of a decedent’s property in the hands of an heir is reset to fair market value as of the date of death. That step-up wipes out decades of deferred capital gains and depreciation recapture in a single event.
Gifted property never touches Section 1014. The step-up is reserved for property that passes through death, not property transferred during life by deed or gift. These two code sections operate in entirely different worlds — and confusing them is an expensive mistake.
The Practical Gap Between a Gift and an Inheritance
The difference between receiving property as a gift versus inheriting it can be the difference between a clean slate and a six-figure tax bill. Keep exchanging through a 1031, hold the property, and at death your heirs take the property at stepped-up basis — the gain accumulated over a lifetime of deferral disappears. Transfer that same property as a gift before death and the recipient is stuck with every dollar of deferred gain still embedded in the basis.
Holding structure at death also matters. Property held outright by one individual passes most cleanly. Spouses in community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — can receive a step-up on the entire property when one spouse dies, not just the deceased spouse’s share. Joint tenancy outside community property states steps up only the decedent’s portion. Partnerships and LLCs can preserve the step-up through an IRC Section 754 election upon a partner’s death. Corporations get no step-up at all.
None of those paths are available to the recipient of a gift. Section 1015 leaves them exactly where the donor stood — and the donor’s basis is the number that counts.