Passing property down to the next generation is often done with good intentions, but without adequate planning and preparation, the tax consequences may catch your family off guard.
Gifting real estate to a child or relative isn’t as simple as handing over the keys—the decision can affect future capital gains, taxes, and other financial outcomes for both parties. Whether you’re thinking about transferring a home, vacation property, or rental, this article outlines how real estate gifts are taxed, what to watch for, and how to approach the process confidently with the right plan in place.
Understanding Taxes on Gifted Property
When you gift real estate to a family member, they don’t owe income tax on the property itself. But if the fair market value of the property exceeds the annual gift tax exclusion—$19,000 per recipient in 2025—the donor is required to file a gift tax return (Form 709).
This doesn’t automatically trigger a tax bill. Most people won’t owe federal gift tax unless they’ve already used up their lifetime gift and estate tax exemption, which currently sits at $13.99 million.
The bigger concern usually comes later. When the recipient eventually sells the property, they’ll be responsible for capital gains taxes based on the donor’s original cost basis—not the property’s value at the time of the gift. This is known as carryover basis, and it can lead to a much higher taxable gain than if the property had been inherited.
Carryover Basis and Why It Matters
Here’s how carryover basis plays out in practice: Say a parent buys a home for $200,000. Years later, they gift it to their child when it’s worth $600,000. If the child eventually sells the home for $650,000, they’ll owe capital gains tax on the full $450,000 increase from the original purchase price—not just the $50,000 gain since they received it.
That’s because the donor’s original cost basis “carries over” to the recipient. In contrast, property passed through inheritance typically receives a stepped-up basis, which resets the cost to its fair market value at the time of death. That difference can mean a significantly lower tax bill—or no capital gains tax at all—for the heir.
If you’re deciding whether to gift property during your lifetime or include it in your estate, this distinction can have major tax implications. Read our blog on the stepped-up basis to learn more.
Best Practices for Gifting Real Estate to Family
Before transferring real estate to a child or other family member, it’s vital to cover all the legal and financial bases. Taking the time to document the gift properly can help avoid misunderstandings and unintended tax consequences.
- Use a formal deed transfer and written agreement to make the gift legally binding.
- Get a current appraisal to establish the fair market value at the time of the gift
- Maintain detailed records of your original purchase price, improvements, and other relevant costs.
- Have open conversations with your family to ensure everyone understands the intent behind the transfer.
- Consider the recipient’s goals—will they keep, sell, or rent the property?
Most importantly, work with an experienced real estate accountant and estate planning attorney. Gifting property isn’t just a generous gesture—it’s a significant financial decision. A professional team can help weigh the long-term tax impact for both parties and determine whether gifting or inheritance offers a better outcome.
Make Informed Real Estate Decisions with Confidence
Transferring real estate to family can be a meaningful part of your legacy, but without the right guidance, it can also create unintended adverse tax consequences. There’s no universal rule for whether gifting or inheriting makes more sense. The best approach depends on your goals, the recipient’s goals, your financial picture, and how the property fits into your broader estate plan.
The Hechtman Group brings deep expertise in both real estate and tax strategy, helping clients make well-informed decisions every step of the way. If you’re planning to gift property or explore your estate planning options, contact us today. We’re here to help you move forward with confidence.