Your cost basis in inherited or gifted property, and the gain when you sell
Updated October 2026
Inherited (IRC 1014). Basis is the fair market value at the date of death, or on the alternate valuation date six months later if the executor elects it on Form 706. If the estate filed Form 706 and sent you a Schedule A (Form 8971), you generally must use that value.
Surviving spouse, joint tenancy or tenancy by the entirety. Half of a qualified joint interest is included in the first spouse’s estate whoever paid for it, so only that half steps up. Your basis is half the original cost, less depreciation allowed to you, plus half the value at death.
Surviving spouse, community property. In Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, both halves step up when at least half is included in the estate. IRS Publication 551’s example: community property with an $80,000 basis worth $100,000 at death gives $50,000 of basis for each half.
Gift (IRC 1015). You take the donor’s adjusted basis. If the value at the gift was below that basis, you have two bases: the donor’s for figuring a gain, and the value at the gift for figuring a loss. Pub. 551’s example: land worth $8,000 with a $10,000 donor basis gives a $2,000 gain when sold for $12,000, a $1,000 loss when sold for $7,000, and neither at $9,000.
For gifts after 1976, basis rises by the part of the gift tax due to the net increase in value: tax × (value − donor’s basis) ÷ (taxable amount of the gift). Pub. 551’s example: a $50,000 gift with a $20,000 basis, $31,000 taxable after the $19,000 annual exclusion, and $6,220 of gift tax. The exact ratio gives $6,019 and a basis of $26,019. Pub. 551 rounds the fraction to 0.97 and shows $26,033, and the calculator displays both. For gifts before 1977, the whole tax is added but not above the value at the gift: $20,000 + $500 = $20,500, while $20,000 + $1,500 is capped at $21,000.
| Situation (bought for $200,000, worth $500,000) | Your basis | Gain if sold for $500,000 | Tax at 15% |
|---|---|---|---|
| Parent dies owning the house alone | $500,000 | $0 | $0 |
| Spouse dies, house held as joint tenants (common-law state) | $350,000 | $150,000 | $22,500 |
| Spouse dies, house is community property (e.g., California, Texas) | $500,000 | $0 | $0 |
| Parent gives you the house while alive | $200,000 | $300,000 | $45,000 |
| You gave the house to a parent 8 months before the parent died | $200,000 | $300,000 | $45,000 |
The 15% column is illustrative: the long-term capital gains rate can be 0%, 15% or 20%, plus 3.8% net investment income tax at higher incomes. A surviving spouse who lived in the house may also exclude up to $250,000 of gain ($500,000 if sold within two years of the death in some cases) under the home sale exclusion.
One-year boomerang rule. IRC 1014(e) denies the step-up for appreciated property you or your spouse gave the decedent within one year of death if it comes back to you. Holding period. Inherited property is always treated as held more than one year; a gift carries over the donor’s holding period. Income in respect of a decedent, such as IRAs, 401(k)s and annuities, gets no step-up at all. Depreciation on inherited rental property restarts from the stepped-up basis of the building, not the land.
The original owner’s adjusted basis is purchase price plus closing costs and improvements, less depreciation. Value at death comes from a date-of-death appraisal, the estate’s Form 706 or Schedule A (Form 8971), or brokerage statements for securities. For a sale, enter the price less commissions and closing costs.
Alternate valuation and special-use (farm) valuation figures, which come from the estate; partnership and trust interests; non-spouse joint tenants, where the step-up follows who paid; property from decedents who died in 2010 with the carryover election; and state inheritance taxes.
Using the parent’s purchase price for inherited property and overpaying tax on decades of gain. Skipping a date-of-death appraisal, which is the best evidence of value years later. Assuming a gift gets a step-up: giving appreciated property before death usually costs heirs more tax than leaving it. Giving a surviving joint-tenant spouse a full step-up: outside community property states only half steps up. Claiming a loss below the donor’s basis on a gift that was already worth less when given.