Gifted a rental property: how carryover basis and depreciation work

The basic rule for a gift

IRS Publication 527 says you cannot use cost as basis for property you received as a gift and sends you to Publication 551. IRS Publication 551 says that if the fair market value of the gift is equal to or greater than the giver's adjusted basis, your basis is the giver's adjusted basis at the time you received it. You add part of any gift tax paid, depending on the date of the gift.

The giver's adjusted basis means their cost, plus improvements, minus depreciation they took. A parent who bought a duplex for $180,000 and took depreciation has a lower adjusted basis than the original cost. Your starting number is that lower figure, not today's value.

Two practical points. First, ask the giver for their basis records before the transfer: the closing statement, improvements, and depreciation schedules. You cannot reconstruct them afterward as easily. Second, a gift of a rental to a family member or into an entity can have other effects, such as a due-on-sale clause in the loan. A lawyer should handle the transfer itself.

A worked example

Example a made-up parent bought a duplex years ago for $200,000 (building $160,000, land $40,000). They have taken $50,000 of depreciation, so their adjusted basis is $150,000. The parent gives the duplex to a child when it is worth $320,000. The child's basis is $150,000, not $320,000.

If the child later sells for $320,000, the gain measured from that basis is $320,000 less $150,000, which is $170,000, before selling costs and any improvements or depreciation the child adds or takes. That is why the basis records matter so much.

Publication 551 also says that for figuring depreciation on business property, you must increase or decrease your basis by any required adjustments while you hold it. In plain terms, once the child owns it, improvements add to basis and depreciation the child takes reduces it.

What if the value is lower than the giver's basis

Publication 551 says if the property's value at the time of the gift is less than the giver's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of it. For gain, it is the giver's adjusted basis. For loss, it is the lower fair market value when you received the gift. If a sale price lands between the two numbers, you have neither gain nor loss.

Example a made-up rental has a giver's adjusted basis of $300,000 and a value of $250,000 on the gift date. A sale at $320,000 uses $300,000 as basis, a $20,000 gain. A sale at $240,000 uses $250,000 as basis, a $10,000 loss. A sale at $270,000 is neither a gain nor a loss.

This case is rare for rentals that have been depreciated for years but it does happen in a falling market. Ask your preparer how it applies to depreciation if it fits you.

Setting up depreciation on the gifted property

1. Get the giver's adjusted basis and split it between land and building. The giver's records may already have the split. If not, use the method in allocating cost between land and building.
2. Depreciate the building share over 27.5 years from when the property is ready and available for rent in your hands, following the rules in Publication 527. See 27.5 year depreciation.
3. Ask your preparer to confirm the depreciation start date and how to treat the giver's earlier depreciation.
4. Keep the giver's records in the property's file forever. They are your proof of basis when you sell.

Example in the made-up duplex, the child's basis is $150,000. If the land share is $40,000, the building share is $110,000 and a full year is $110,000 divided by 27.5, which is $4,000. The first and last years are partial under the mid-month rule.

How to record the gift in the books

A gift is not income and nothing is bought. Open the property's accounts at carryover basis, with the other side of the entry in an equity account. Record any loan that goes with it as a liability.

Example debit Land $40,000, debit Building $110,000 and credit Equity, gifted property $150,000. Debits and credits both total $150,000.

If the property is moved into an LLC you own, the LLC's books start the same way, as an owner contribution at your basis, covered in recording an owner contribution.

A transfer from a spouse follows a similar idea

Publication 551 says the basis of property transferred to you by your spouse, or by a former spouse as part of a divorce, is the same as the spouse's adjusted basis. The idea is the same: no reset to current value. Divorce transfers also bring loan and legal questions that need a lawyer, so treat this article as a starting point only.

How DoorKeeping handles it

In DoorKeeping each property is its own LLC with its own ledger, so you can open it at carryover basis and keep the giver's records in the property's documents. Ask Claude or ChatGPT to prepare the opening entry and approve it with one tap. DoorKeeping gives no tax or legal advice and does not hold rent, so have your preparer confirm basis and the depreciation start.

Sources

1. IRS, Publication 551, Basis of Assets, read Oct 30, 2026
2. IRS, Publication 527, Residential Rental Property (2025), read Oct 30, 2026

Questions

What is my basis in a rental property I was given?

Generally the giver's adjusted basis at the time of the gift, if the property was worth at least that much, plus part of any gift tax paid.

Is a gifted rental property stepped up to current value?

No. That is true of inherited property in most cases. Gifts carry over the giver's basis.

What if the rental was worth less than the giver's basis?

Then one basis applies for gain and a lower one for loss, as Publication 551 explains. A sale between the two numbers gives neither.