GroundSkill
Determine asset basis for purchased, gifted, and inherited property
Every sale ends with a subtraction: amount received minus basis. The amount received is on the closing statement, but the basis has to be reconstructed, sometimes decades after the property changed hands. This lesson builds the starting number for three origins: property bought, property received as a gift, and property inherited. Later lessons use this number when they figure gain, apply the residence exclusion, or defer the sale.
A bought asset starts at its cost basis: the cash, debt, property, or services paid plus the costs of getting it ready, such as sales tax, freight, and installation. For real property, settlement fees and closing costs (abstract, recording, surveys, transfer taxes, title insurance, and seller amounts the buyer assumes) are part of basis, while loan costs are not: points paid to obtain a loan are generally deducted over the loan term rather than added, seller-paid points reduce the home's basis, and an assumed mortgage counts toward basis. That starting number then moves over the holding years. Capital improvements push it up; depreciation taken (or allowed) and deducted casualty losses pull it down. The result is adjusted basis, the number a later sale subtracts.
A photographer buys studio lighting for $4,800 cash, pays $200 freight, and pays $150 for mounting before first use. Cost basis is $4,800 + $200 + $150 = $5,150. Two years later she adds a $900 power upgrade, raising basis to $6,050, and claims $1,200 of depreciation, lowering it to an adjusted basis of $4,850.
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The basis of property you buy is usually its cost. You may also have to capitalize (add to basis) certain other costs related to buying or producing the property.View on the source
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Settlement costs. Your basis includes the settlement fees and closing costs for buying property. You can't include in your basis the fees and costs for getting a loan on property. A fee for buying property is a cost that must be paid even if you bought the property for cash.View on the source
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Points. If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), don't add the points to the basis of the related property. Generally, you deduct the points over the term of the loan. Points on home mortgage. Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. If certain requirements are met, you can deduct the points in full for the year in which they're paid. Reduce the basis of your home by any seller-paid points.View on the source
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Assumption of mortgage. If you buy property and assume (or buy subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage.View on the source
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If you make improvements to the property, increase your basis. If you take deductions for depreciation or casualty losses, reduce your basis.View on the source
Maya buys a house for $250,000. At closing she pays: abstract fee $600, recording fee $300, transfer tax $1,200, back taxes the seller owed of $2,000 that she agrees to pay, discount points of $2,500 on her mortgage, and $1,500 placed in escrow for future taxes. What is her cost basis in the house?
A gift carries the giver's investment forward. When the gift-date value covers the donor's adjusted basis, that donor basis serves for both gain and loss. Gift tax paid can add to that basis: for a gift after 1976, basis rises by the part of the gift tax due to the net increase in value, figured as gift tax × (net increase in value ÷ amount of the gift); for a gift before 1977, basis rises by the gift tax paid but never above the gift-date value. When the value sits below the donor's basis, the recipient uses two different bases: the donor's basis for figuring gain and the gift-date value for figuring loss. A sale between those two numbers produces neither gain nor loss.
| Gift-date value vs donor basis | Gain basis | Loss basis |
|---|---|---|
| Value covers basis | Donor's basis | Donor's basis |
| Value below basis | Donor's basis | Gift-date value |
The holding period follows the basis. Property taking the donor's basis tacks the donor's holding period, so it begins the same day the giver's period began; property taking gift-date value as its basis starts the day after the gift.
A father gives his daughter land with an adjusted basis of $30,000 when its value is $22,000. She sells for $35,000: gain is figured from $30,000, so the gain is $5,000. Had she sold for $18,000, loss would be figured from $22,000, a $4,000 loss. Had she sold for $26,000, the gain test gives a loss and the loss test gives a gain, so she has neither.
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To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it.View on the source
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Gift received after 1976. If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. Figure the increase by multiplying the gift tax paid by a fraction. The numerator of the fraction is the net increase in value of the gift, and the denominator is the amount of the gift.View on the source
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Gift received before 1977. If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. However, don't increase your basis above the FMV of the gift at the time it was given to you.View on the source
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Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property.View on the source
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Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis, earlier).View on the source
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Gift If your basis is giver’s adjusted basis, same day as giver’s holding period began. If your basis is FMV, day after date of gift.View on the source
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Gift. If you receive a gift of property and your basis in it is figured using the donor’s basis, your holding period includes the donor’s holding period. For more information on basis, see Pub. 551.View on the source
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If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property.View on the source
Elena received land as a gift. The donor's adjusted basis just before the gift was $32,000 and the land's fair market value on the gift date was $24,000. Elena made no basis adjustments while holding it and sells it for $27,000. What is her result?
Death generally resets the basis. The heir's starting point is generally the fair market value on the decedent's date of death (the estate can instead elect alternate-valuation or special-use farm values, and beneficiaries who receive a Schedule A use the estate-tax value shown there). One round trip is blocked: appreciated property the heir or the heir's spouse gave the decedent within a year before death keeps the decedent's adjusted basis when it comes back, so a gift on the way in cannot manufacture a step-up on the way out. In community-property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually treated as owning half the community property; when one spouse dies, the total community value, even the part belonging to the surviving spouse, generally becomes the basis of the entire property if at least half its value is includible in the decedent's gross estate. For the later sale's holding period, an heir is considered to have held inherited property longer than 1 year, no matter how soon it is sold.
A son inherits a house worth $410,000 when his mother dies and sells it for $435,000 with no later adjustments. His basis is the $410,000 date-of-death value, so his gain is $25,000. Had he given that house to his mother eight months before her death and received it back under her will, his basis would stay at her adjusted basis instead.
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Generally, the basis of property inherited from a decedent is one of the following. 1. The FMV of the property at the date of the individual's death.View on the source
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Appreciated property. The above rule doesn't apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. Your basis in this property is the same as the decedent's adjusted basis in the property immediately before their death, rather than its FMV. Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis.View on the source
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Community Property In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married individuals are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return.View on the source
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Inherited property. If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it.View on the source
Henry inherits a house. The decedent's adjusted basis was $60,000 and the house's fair market value at death was $250,000. Henry sells it 4 months later for $260,000. What are Henry's basis and result?
The course asks you questions like these as you learn, brings back the ones you miss, and ends with full-length practice exams.
See the course Or take the free 12-question checkGroundSkill is independently produced and is not affiliated with or endorsed by the IRS. Sources last checked 2026-09-14. Exam preparation, not tax advice.