Gifting Real Estate: Basis, the Exclusion, and the Deed

Do I pay tax if I give my house to my child?

The gift is reportable, and gift tax is due only once the giver’s lifetime taxable gifts exceed the exemption, but there is an income-tax cost later. The gift is measured at the property’s value on the date of the gift (IRC § 2512). The part above the annual exclusion — $19,000 per recipient for 2026 (Rev. Proc. 2025-32) and $20,000 for 2027 (Rev. Proc. 2026-35) — goes on a gift-tax return and reduces the giver’s lifetime exemption, which is $15,000,000 for 2026 (IRC § 2010(c)(3)).

For 2027 the exemption is $15,480,000 (Rev. Proc. 2026-35). The recipient owes no income tax on receiving it (IRC § 102) but keeps the giver’s basis (IRC § 1015), so the built-in gain is taxed when the recipient sells.

How the gift is valued

The amount of the gift is fair market value: the price at which the property would change hands between a willing buyer and a willing seller, neither compelled to act and both reasonably informed (Treas. Reg. § 25.2512-1). Two points from that regulation and the Form 709 instructions matter for real estate:

• The local property-tax assessment is not the value to report unless it actually equals fair market value on the date of the gift.
• The instructions treat an arm’s-length price paid for the property on or before the valuation date as generally the best indication of value; without one, they call for the comparable-sales method, adjusted for differences in sale date, size, condition, and location.

The return asks for a legal description of each parcel, the street address, and a short statement of improvements, and any appraisal used to set the value is attached.

Reporting and adequate disclosure

A gift above the annual exclusion requires Form 709 (IRC § 6019), generally due by April 15 of the year after the gift. Filing is not the same as paying: the excess is applied against the lifetime exemption. How the exclusion itself works is on the annual-exclusion page, and the return is covered on the Form 709 page.

Disclosure quality decides how long the IRS can challenge the value. The normal assessment period is three years after the return is filed (IRC § 6501(a)). For a gift that is not adequately disclosed, the tax can be assessed at any time (§ 6501(c)(9)). Under Treas. Reg. § 301.6501(c)-1(f), a gift is adequately disclosed when the return, among other items, describes the property and any consideration received, identifies the parties and their relationship, and explains in detail how the value was determined.

An appraisal can stand in for that detailed explanation if it meets the regulation’s terms. The appraiser must regularly perform appraisals or hold out as an appraiser, be qualified for this type of property, and not be the donor, the donee, a family member of either, or their employee. The appraisal must state the transfer date, the appraisal date and purpose, a description of the property, the method and reasoning, and the specific basis for the value, such as comparable sales.

Carryover basis

Property received by gift keeps the donor’s basis (§ 1015(a)). Property received from a decedent generally takes a basis equal to fair market value at the date of death (IRC § 1014(a)). For a house that has appreciated, that difference is the main cost of giving during life rather than at death.

Hypothetical figures for illustration; improvements, depreciation, and selling costs are ignored. Basis rules: IRC § 1015(a) and § 1014(a).

Two refinements apply to gifts:

• Property worth less than its basis. If the donor’s basis is higher than the value at the time of the gift, the recipient uses that lower value as basis for figuring a loss (§ 1015(a); Treas. Reg. § 1.1015-1). A sale between the two figures produces neither gain nor loss.
• Gift tax actually paid. If the donor paid gift tax on the transfer, basis is increased by the share of that tax attributable to the property’s net appreciation, and never above fair market value at the time of the gift (§ 1015(d)).

The mechanics of the adjustment at death are on the step-up in basis page, and the wider comparison is on gifting versus inheriting.

The home-sale exclusion

IRC § 121 excludes up to $250,000 of gain on the sale of a principal residence ($500,000 on certain joint returns; both figures are fixed in § 121(b)). The seller must have owned the property and used it as a principal residence for periods totaling at least two years during the five years ending on the sale date.

The test is applied to the taxpayer who sells. A parent who gives the house away does not sell it, so the parent’s exclusion is not used. The child must meet the ownership and use tests personally to exclude gain on a later sale. Section 121 counts a prior owner’s period only in the cases it lists, which involve a spouse, a former spouse, or a deceased spouse (§ 121(d)).

Giving the house but continuing to live there

IRC § 2036(a) includes in the gross estate any property the decedent transferred while keeping, for life, its possession or enjoyment. A transfer for full value in a bona fide sale is outside the rule. The retained right does not have to be written down: under Treas. Reg. § 20.2036-1, an interest is treated as retained if there was an understanding, express or implied, at the time of the transfer that it would later be conferred.

Property that has to be included in the gross estate is treated as acquired from the decedent for basis purposes (§ 1014(b)(9)), so inclusion changes the basis result as well as the estate-tax result.

Partial interests and mortgaged property

A gift does not have to be the whole property. The gift-tax regulations give this example: a person who buys property with their own funds and takes title with another person as joint owners with rights of survivorship, where either can sever the interest, has made a gift of half the value (Treas. Reg. § 25.2511-1(h)(5)). If the reported value of a partial interest reflects a discount for a fractional interest in real estate, the Form 709 instructions require the filer to say so and attach an explanation of the basis for the discount and its amount.

Debt changes the analysis. A transfer for less than full value is a gift only to the extent the value exceeds the consideration received (§ 2512(b)), and for income tax a gift of property counts as a disposition in which the liabilities the donor is relieved of are part of the amount realized (Treas. Reg. § 1.1001-2). The transfer is then part gift and part sale: the donor has gain to the extent the amount realized exceeds adjusted basis, and no loss is allowed (Treas. Reg. § 1.1001-1(e)). The recipient’s basis starts from the greater of the amount the recipient paid or the donor’s adjusted basis, with further adjustments set out in the regulation (Treas. Reg. § 1.1015-4).

A hypothetical example: a house worth $400,000, with an adjusted basis of $150,000, is given subject to a $200,000 mortgage that the child takes over. The parent’s amount realized is $200,000, so the parent has a $50,000 gain. Treating the $200,000 of debt the child takes over as consideration under § 2512(b), the gift is the remaining $200,000 of value.

The deed and state rules

Federal tax law asks when the donor gave up control. A gift is complete when the donor has parted with dominion and control over the property (Treas. Reg. § 25.2511-2(b)). What it takes to transfer title is a question of state law: each state sets its own requirements for signing, delivering, and recording a deed. Transfer taxes, recording fees, and any property-tax reassessment on a change of ownership are set by the state or county and vary widely, so confirm them with the county recorder or assessor where the property sits.

Where state law allows it, a transfer-on-death deed is the at-death alternative: the owner keeps the property for life and it passes at the owner’s death rather than by lifetime gift. See the state-by-state transfer-on-death deed comparison. A gift of a home can also affect eligibility for Medicaid long-term care coverage.

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