Carryover basis from donor to recipient
When you give away property, the recipient (donee) generally takes your carryover basis — your original cost, plus improvements, minus all depreciation you claimed. If you claimed $60,000 in depreciation and gift the property, the donee inherits a basis that is $60,000 lower than your original cost. When they eventually sell, they will owe tax on that $60,000 at up to 25% — just as you would have.
No step-up in basis for gifts
Unlike inherited property — where the heir receives a step-up to the date-of-death fair market value that permanently erases deferred recapture — gifted property carries the carryover basis. The recapture doesn't disappear with a gift; it transfers to the recipient. If avoiding recapture is the goal, inheriting is far more effective than gifting.
Gift tax considerations
A large gift may trigger gift tax reporting on Form 709 if it exceeds the annual exclusion. Gifts that use lifetime exemption also reduce the estate tax exemption available at death. Before gifting a rental, consult a CPA or estate attorney — the combined income-tax and gift-tax picture is complex enough that the strategy often backfires without careful planning.
Frequently asked questions
Does gifting rental property avoid depreciation recapture?
No. The recipient inherits your adjusted basis including deferred recapture. It transfers rather than disappears.
How is gifted property different from inherited property for recapture purposes?
Inherited property typically receives a step-up in basis to fair market value, eliminating deferred recapture. Gifted property carries carryover basis — recapture deferred, not eliminated.
Sources
- IRS Topic No. 409 — Capital Gains and Losses
- IRS Publication 544 — Sales and Other Dispositions of Assets
- IRS Publication 946 — How to Depreciate Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.