Cost basis of gifted property

A friend (and his sister) were gifted property by their father when he was still alive. The fair market value of the property at the time of the gift was higher than his original purchase price.

The father subsequently died.

They sold the property after the father’s death for a substantial gain. We are trying to figure out the capital gain to pay tax.
What is the cost basis of the property?

" If the FMV of the property at the time the donor made the gift is equal to or greater than the donor’s adjusted basis, your adjusted basis is the donor’s adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property."

I don’t understand what they mean by the donor’s adjusted basis just before the donor made the gift.


I will point out that if the beneficiaries had inherited the property from the father, rather than being gifted the property before his death, the cost basis would have been the value of the property at the time of the father’s death, potentially resulting in little or no capital gains taxes being owed on the sale.

Seems to me that the part about ‘just before the donor made the gift’ just means that you need to figure out the donor’s basis as of the day they made the gift. Typically, the donor’s basis would be the original purchase price, plus any improvements (not repairs) that were made to the property up to, and including, the day that title transferred. Publication 551 p551.pdf ( has more details on how to figure specific adjustments to basis, including things like impacts of having insurance claims paid, energy credits, etc. that would be dependent on the history of the specific property.

I would also point out that the beneficiaries also need to account for any depreciation that should have been taken during the time the donor owned the property, in addition to any depreciation that accrued while they owned the property.

If the beneficiaries have access to the donor’s prior tax returns, that would probably be very helpful.



One quibble on this, as I get to experience it myself in a week or two, repairs do not count but repairs you make to improvements do count. The patio pavers I installed a few years ago that now need repair can be added to my cost basis. So, yay?!?

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The irs publication does include replacement of a roof as an example that can increase basis. Major remodelling increases basis. Minor repairs no. But probably subject to debate.

I wonder how often these get audited. It might be mostly an honor system.