CGT on gift of property: Capital gains tax on gifted property explained for US expats (2026)

When you receive gifted property, the IRS generally assigns you the donor's original adjusted basis under Section 1015 – not the fair market value at the time of the gift.

If you later sell that property for more than the carryover basis, you owe capital gains tax on the difference.

The dual-basis exception applies when the property's fair market value at the time of the gift was lower than the donor's basis.

US citizens and green card holders are subject to CGT on gifted property sold in any country.

Quick answer

• Basis rule: You generally take the donor's adjusted basis under IRC Section 1015, not the property's market value when you received it.
• Holding period: You tack the donor's holding period onto your own, which often qualifies the gain as long-term from day one.
• Tax rates: CGT on gift of property at long-term rates is 0%, 15%, or 20% for tax year 2025, depending on your taxable income and filing status.

How the IRS defines a gift for tax purposes

The IRS treats a transfer as a gift when property changes hands for less than adequate and full consideration in money or money's worth.

A gift is different from a sale and different from an inheritance. In a sale, the buyer pays fair market value or close to it – the transaction sets a new cost basis. In a gift, no adequate payment changes hands, so the original basis carries over.

An inheritance is different again – inherited property generally receives a stepped-up basis to fair market value at the date of death.

The donor – not the recipient – is responsible for any gift tax that may be owed.

The donor files Form 709 if the value of gifts to any one person exceeds the annual exclusion amount, which is adjusted for inflation each year.

Gifts are not subject to capital gains tax at the moment you receive them. Receiving a gift does not trigger capital gains tax on gifts for the recipient.

The tax event happens later, when you sell the property.

Section 1015 carryover basis: The core rule for gifted property

Under IRC Section 1015, the recipient of a gift takes the donor's adjusted basis as their own – meaning any built-in gain the donor accrued follows the property to the new owner.

This is the carryover basis rule, and it applies to all types of capital gains tax on gifted property – real estate, shares, land, and other capital assets.

To determine your basis in gifted property:

1. Identify the donor's original purchase price. This is the starting point for the basis calculation.
2. Add capital improvements and subtract depreciation to arrive at the donor's adjusted basis. If the donor renovated a kitchen or replaced a roof, those costs increase the basis. If the donor claimed depreciation on rental property, that reduces it.
3. Apply the dual-basis rule if the fair market value at the gift date was lower than the donor's adjusted basis. This is covered in detail below.
4. Use the resulting basis to calculate your gain or loss when you eventually sell. Your gain equals the sale price minus this carryover basis.

Capital improvements include structural additions, new roofing, and system upgrades – but not routine maintenance like painting or minor repairs.

 

The dual-basis rule: when gifted property has a built-in loss

If the sale price falls between the donor's basis and the FMV at the gift date, neither a gain nor a loss is recognized.

The dual-basis rule creates three outcome zones when the property's fair market value at the time of the gift was lower than the donor's adjusted basis.

Based on a common TFX client scenario: A donor purchased an investment property for $300,000. At the time of the gift, its fair market value had dropped to $220,000. If the recipient later sells it for less than $220,000, the FMV at the gift date is generally used to calculate the loss. If the property is held for personal use, however, a loss on the sale is generally not deductible.

• Sell above the donor's basis – above $300,000 in this example – and you have a taxable gain, calculated using the donor's basis.
• Sell below the FMV at the gift date – below $220,000 – and you have a deductible loss, calculated using the FMV at the gift date as your basis.
• Sell between the two – between $220,000 and $300,000 – and you recognize neither gain nor loss. The $250,000 sale in this scenario falls in the no-gain, no-loss zone.

The dual-basis rule prevents taxpayers from manufacturing artificial losses by gifting depreciated property to a related party.

If you receive property where the FMV at the gift date was lower than the donor's basis, keep records of both numbers. You may need either one depending on the eventual sale price.

Tacking the holding period: How long have you 'owned' gifted property?

When you receive a gift, you are generally allowed to tack the donor's holding period onto your own, which can qualify your gain as long-term from the moment you sell.

Long-term treatment – property held more than one year – matters because the tax rates are substantially lower. For tax year 2025, long-term capital gains rates are 0%, 15%, or 20% depending on your taxable income and filing status.

Short-term gains are taxed at ordinary income rates, which can reach 37%.

The Net Investment Income Tax adds a 3.8% surcharge on top of the capital gains rate for taxpayers with modified adjusted gross income above $200,000 for single filers or $250,000 for married filing jointly. This threshold is not indexed for inflation.

If the donor bought the property in 2010 and gifted it to you in 2025, you are treated as having held the property since 2010 for purposes of the long-term vs. short-term classification.

Gifted property vs inherited property: Key tax differences

Inherited property typically receives a stepped-up basis to fair market value at the date of death, while gifted property carries over the donor's original basis – a distinction that can mean tens of thousands of dollars in tax.

The stepped-up basis on inherited property eliminates any built-in gain that accrued during the decedent's lifetime. The carryover basis on gifted property preserves it.

 

For gifted property vs inherited property, the practical takeaway is this: if a family member plans to transfer appreciated property, the tax outcome can differ by tens of thousands of dollars depending on whether the transfer happens during life or at death.

Based on a common TFX client scenario: Your parent purchased a rental apartment for $200,000 in 2005, added $30,000 in improvements, and claimed $45,000 in depreciation. The donor's adjusted basis is $185,000. At the gift date in 2023, FMV was $350,000 – above the basis, so the dual-basis rule does not apply. You sell in 2025 for $400,000 net of selling costs.

Your gain: $400,000 – $185,000 = $215,000 in long-term capital gains on gifted land or real property.

Report this on Form 8949 and transfer the result to Schedule D.

Tax year 2025 capital gains tax rates on gifted property sales

Most middle-income taxpayers pay a 15% federal long-term capital gains rate on gains from gifted property held more than one year.

The table below shows the tax year 2025 long-term capital gains tax rates for gifted property by filing status. The income thresholds are adjusted annually for inflation.

 

Short-term gains – on property where the combined holding period is one year or less – are taxed at ordinary income rates, which range from 10% to 37% for tax year 2025.

 

 

State income taxes are separate and vary widely – some states impose no income tax at all, while others tax capital gains at rates exceeding 10%.

Capital gains tax on gifted property for US expats: special considerations

US citizens and green card holders living abroad owe US capital gains tax on worldwide income – including gains from selling gifted property located in any country.

This is the core principle of citizenship-based taxation. If you sell a gifted apartment in London or a gifted parcel of land in Mexico, you report the gain on your US return just as you would for property in the US.

The Foreign Tax Credit on Form 1116 is the primary tool to offset double taxation.

If the foreign country also taxes the gain, you can generally credit those foreign taxes against your US tax liability on the same income.

The Foreign Earned Income Exclusion does not apply to capital gains. Only earned income – wages, salaries, and self-employment income – qualifies for the FEIE.

Investment income, including gains from selling gifted property, falls outside the exclusion entirely.

 

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Gifts of foreign property to US persons: Reporting requirements

A US person who receives a gift of foreign real estate or other property from a non-US person may be required to report it on Form 3520 if the value exceeds the applicable reporting threshold.

Form 3520 is an information return, not a tax return – it does not create a separate tax liability.

For tax year 2025, gifts from a nonresident alien or foreign estate must be reported if the aggregate value exceeds $100,000. Gifts from foreign corporations or foreign partnerships trigger a reporting obligation at a lower threshold – $20,116 for tax year 2025.

Failure to file Form 3520 can trigger a penalty of 5% of the gift's value per month, up to a maximum of 25%. These penalties apply even though no tax is owed on the gift itself.

The carryover basis rules under Section 1015 still apply when you eventually sell the property.

Capital gains tax on foreign property follows the same basis mechanics – the donor's adjusted basis carries over regardless of where the property is located.

Certain tax-favored foreign trusts may qualify for relief from Form 3520 filing under Revenue Procedure 2020-17.

This narrows the reporting obligation for eligible retirement and savings plans.

 

Capital gains tax on gifted shares and stock

The donor's cost basis and original purchase date transfer with gifted shares, so a stock bought decades ago at a low price carries that embedded gain to the recipient.

The carryover basis rule under Section 1015 applies to CGT on gifted shares just as it does to real property. There is no distinction in the basic mechanics.

• The donor's adjusted basis becomes your basis. If a parent bought shares for $10,000 in 1995 and gifts them to you when they are worth $150,000, your basis is $10,000.
• Holding period tacking works the same way. The donor's acquisition date carries over, so the gain qualifies as long-term if the donor held the shares for more than one year.
• Gifted shares in a foreign corporation may trigger additional considerations. If the corporation qualifies as a Passive Foreign Investment Company (PFIC), the gift itself is generally treated as a taxable disposition to the donor under the PFIC excess distribution rules – not simply a basis carryover with tax deferred until the recipient sells. The donor may owe tax at the time of the gift unless a qualified electing fund (QEF) or mark-to-market election was already in place before the gift. If you hold the shares in a foreign financial account, separate FBAR reporting may also be required. If you hold the shares in a foreign financial account, separate FBAR reporting may be required.
• Wash-sale rules do not apply to gifts, but they do apply to capital gains on gifted shares if the recipient sells at a loss and reacquires substantially identical securities within 30 days.

Capital gains tax on gifted stock follows the same Form 8949 reporting process as any other capital asset sale. Enter the donor's adjusted basis as your cost basis, use the tacked holding period to classify the gain, and transfer the result to Schedule D.

Can you avoid capital gains tax by gifting property?

Gifting appreciated property does not eliminate the capital gains tax – it transfers the tax liability to the recipient, who inherits the donor's low basis and the embedded gain.

This is one of the most common misconceptions TFX encounters. A donor who gifts a property with a $100,000 basis and a $500,000 fair market value has not made the $400,000 gain disappear.

The recipient now holds a property with a $100,000 basis, and the full $400,000 gain will be taxable when they sell.

That said, legitimate strategies exist to reduce or manage the tax:

• Gifting to a lower-bracket family member can result in a lower effective rate if the recipient's income places them in the 0% or 15% long-term capital gains bracket.
• Charitable gifting to a 501(c)(3) eliminates the capital gains tax entirely for the donor. The donor may also claim a charitable deduction for the fair market value of the property.
• Installment sales after receiving the gift can spread the gain recognition over multiple tax years, keeping each year's income below higher rate thresholds.

Complete elimination of the capital gains tax on gifted property is rarely possible – but careful planning can significantly reduce the effective rate.

 

The line between legitimate tax avoidance and tax evasion matters here.

Every strategy above is legal, but structuring a gift solely to evade tax obligations is not.

Legitimate strategies to reduce CGT on gifted property

The Section 121 primary residence exclusion can shelter a substantial portion of gain if the recipient occupies the gifted home as their principal residence for the required period.

Four strategies that may reduce or defer CGT when gifting property or selling gifted property:

1. Primary residence exclusion under Section 121. If the recipient lives in the gifted home as their principal residence for at least two of the five years before the sale, they can exclude up to $250,000 in gain as a single filer or $500,000 as married filing jointly (2025). The ownership and use tests must both be met.
2. 1031 like-kind exchange. If the gifted real property is held for investment or business use, a properly structured Section 1031 exchange may defer gain. In a deferred exchange, replacement property must generally be identified within 45 days and received within 180 days after the transfer, or by the due date of the tax return for that year, including extensions, whichever is earlier.
3. Installment sale after receiving the gift. Spreading the sale over multiple years can keep annual income below higher rate brackets. Each payment includes a proportionate share of the gain, basis recovery, and interest.
4. Charitable remainder trust. Donating appreciated gifted property to a charitable remainder trust eliminates the immediate capital gains tax and provides the donor with an income stream for a defined period. The remainder goes to the charity at the end of the trust term.

CGT gift relief: Does the US have an equivalent?

Unlike the UK system, the US does not offer a hold-over or rollover relief specifically for gifts – instead, the carryover basis rule under Section 1015 is the mechanism that defers tax until the recipient sells.

If you are searching for CGT gift relief in the US context, no direct equivalent of the UK's Gift Hold-Over Relief exists.

In the UK, Gift Hold-Over Relief under Section 165 TCGA 1992 allows the donor to defer capital gains tax on gifts of qualifying business assets by passing the gain to the recipient.

The US achieves a similar economic result through the carryover basis – the gain is deferred because the recipient takes the donor's low basis, and no tax is triggered until a sale occurs. However, the US mechanism is automatic and applies to all gifts of property, not just business assets.

A Qualified Opportunity Fund is not a general gift-relief provision. Under the rules applicable to eligible gains recognized before January 1, 2027, a taxpayer may temporarily defer qualifying gain by making a timely qualifying investment in a QOF and making the required election.

 

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State capital gains tax on gifted property: What expats must know

Most US states that impose an income tax also tax capital gains, and some states do not recognize the same exclusions or deferrals available at the federal level.

State-level capital gains tax adds a layer of complexity that expats often overlook.

• State of domicile vs. state where property is located. Some states tax you based on where you are domiciled. Others tax gains on real property located within the state, regardless of where you live.
• States with no income tax. Several states impose no individual income tax at all. This list changes over time – verify current state law before assuming no state filing obligation.
• California's aggressive sourcing rules. California taxes gains on real property located in the state regardless of the seller's residence. If you received a gifted California property, California will tax the gain on sale even if you live abroad.
• State filing obligations for expats. Moving overseas does not automatically end your state tax residency. Some states require affirmative steps to establish non-residency.

 

Gifting property to non-US persons: Donor's CGT exposure

A US person who gifts appreciated property to a non-US person does not trigger capital gains tax at the time of the gift – but the donor may owe gift tax, and the transfer requires reporting on Form 709.

The gift generally does not trigger capital gains tax for the donor. Instead, the recipient generally takes a carryover basis, so the property retains its built-in gain. Whether the non-US recipient later owes US tax on a sale depends on the recipient's US tax status and whether the asset is subject to US taxing rules, such as FIRPTA for US real property interests.

If the non-US recipient later sells, US tax may not apply to them – depending on whether the property is a US real property interest and whether a tax treaty applies.

This makes CGT on gifting property to a non-US person a potential planning opportunity, but one with significant compliance risks.

The donor must file Form 709 to report the gift. If the gift exceeds the annual exclusion amount, it reduces the donor's remaining lifetime gift and estate tax exemption.

When a gift involves property in a foreign currency jurisdiction, proper documentation of the FMV and basis in US dollars at the time of the gift is essential.

Accurate foreign income timing and currency conversion affect how the gain is calculated on your US return.

 

When the non-US recipient later sells a US real property interest, the buyer generally must withhold 15% of the gross sale price under FIRPTA.

The rate drops to 10% if the buyer will use the property as a residence and the sale price is $1,000,000 or less, and no withholding applies at $300,000 or below under the same residence-use exception. Factor this into planning before making the transfer.

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Common mistakes when reporting capital gains on gifted property

The single most common error TFX sees is recipients using the property's fair market value at the gift date as their basis – which is incorrect under Section 1015 and can trigger an IRS notice.

Six errors that come up repeatedly in gifting property and capital gains tax situations:

• Using FMV at gift date as basis instead of the donor's adjusted basis. This overstates the basis, understates the gain, and can trigger an IRS notice or audit.
• Failing to apply the dual-basis rule when FMV was lower than the donor's basis. If you use the donor's basis to claim a loss in this scenario, the IRS will disallow it.
• Not tacking the donor's holding period. Without the tacked period, a gain that should be long-term gets reported as short-term – and taxed at ordinary income rates.
• Omitting Form 3520 when the gift came from a foreign person. The reporting threshold is $100,000 for gifts from nonresident aliens or foreign estates. Missing this form triggers a 5%-per-month penalty.
• Forgetting state-level capital gains reporting. Selling a gifted property in a state that taxes capital gains creates a state filing obligation – even for expats whose returns may face extended IRS scrutiny.
• Claiming the primary residence exclusion without meeting the ownership and use tests. Section 121 requires two years of ownership and two years of use as a principal residence within the five years before the sale. Receiving the property as a gift does not automatically satisfy these tests.

Expatriate estate planning: Using gifts to manage future CGT exposure

Gifting appreciated property to a family member in a lower tax bracket can reduce the family's federal capital gains tax on an eventual sale if the recipient is subject to a lower applicable capital-gains rate than the donor. Other rules may affect the result, so the transfer should be evaluated before the gift is made.

The decision to gift property now versus hold it until death has significant tax consequences.

If you gift appreciated property, the recipient takes your low carryover basis and will owe capital gains tax on the built-in gain when they sell. If you hold the property until death, the recipient generally receives a stepped-up basis to fair market value – eliminating the built-in gain entirely.

The interplay between gift tax, estate tax, and capital gains tax makes this decision complex for expats. The unified credit exemption amount, which was recently increased and made permanent by new legislation, affects whether gifting now or holding until death produces a better tax outcome.

For CGT on a property gift involving high-value assets, the numbers often favor holding until death – because the step-up eliminates the capital gains tax that would otherwise apply.

However, if the donor expects the property to appreciate significantly, gifting now at a lower value may reduce the estate's overall exposure to gift and estate tax.

 

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