Basis of Property Received by Individuals
Purchased property generally starts with cost basis. Gifted property may use the donor’s basis for gain and a lower gift-date value for loss. Inherited property generally starts with date-of-death fair market value, subject to exceptions.
Purchase, gift or inheritance?
| How acquired | Starting basis rule | Watch for |
|---|---|---|
| Purchase | Cost plus capitalizable acquisition costs | Later improvements and depreciation change adjusted basis. |
| Gift: value at least donor basis | Generally carryover donor basis | A gift-tax adjustment may apply. |
| Gift: value below donor basis | Donor basis for gain; gift-date value for loss | A sale between the two amounts produces neither gain nor loss. |
| Inheritance | Generally fair market value at death | Alternate valuation, consistency rules and other exceptions. |
Purchase
- Starting basis rule
- Cost plus capitalizable acquisition costs
- Watch for
- Later improvements and depreciation change adjusted basis.
Gift: value at least donor basis
- Starting basis rule
- Generally carryover donor basis
- Watch for
- A gift-tax adjustment may apply.
Gift: value below donor basis
- Starting basis rule
- Donor basis for gain; gift-date value for loss
- Watch for
- A sale between the two amounts produces neither gain nor loss.
Inheritance
- Starting basis rule
- Generally fair market value at death
- Watch for
- Alternate valuation, consistency rules and other exceptions.
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For the July 2026-February 2027 SEE window: tax law through December 31, 2025; questions generally use calendar year 2025.
How to work through the decision
- 1Identify acquisition method
- 2Select gain or loss basis
- 3Compare with sale proceeds
Choose the acquisition rule before using the sale price
Purchased property generally starts with cost basis, including eligible acquisition costs. A gift usually starts with the donor’s adjusted basis for determining gain. Inherited property generally starts with fair market value at death, or the applicable alternate valuation where properly elected. These rules answer how the property entered the taxpayer’s hands; current market value is not a substitute for whichever rule applies.
A transfer between spouses or incident to divorce generally uses a carryover rule rather than a new fair-market-value basis, subject to exceptions. Property received for services can instead create compensation and a corresponding basis. Read the transaction description carefully: “received without paying cash” covers several different tax events. Keep gift-tax adjustments, special inherited-property rules and later improvements separate so the basic rule does not hide an exception.
Use two comparisons when a gift has declined in value
When gift-date fair market value is below the donor’s adjusted basis, there can be one basis for gain and another for loss. For gain, use the donor’s adjusted basis, with applicable adjustments. For loss, use gift-date fair market value, with applicable adjustments. If the sale produces a loss using the gain basis but a gain using the loss basis, neither gain nor loss is recognized. Do not average the two bases.
Work the question by comparing net sale proceeds with both endpoints. Above the gain basis, compute gain using that basis. Below the loss basis, compute loss using that basis, then consider whether the loss is deductible for the property’s use. Between them, the result is the no-gain/no-loss interval. A personal-use loss can be nondeductible even when the arithmetic shows a loss; basis and deductibility are separate questions.
| Net sale proceeds | Basis used | Result before other rules |
|---|---|---|
| Above donor basis | Donor’s adjusted basis for gain | Recognized gain |
| Below gift-date FMV | Gift-date FMV for loss | Loss subject to deductibility rules |
| Between both amounts | Test both bases | Neither gain nor loss |
Above donor basis
- Basis used
- Donor’s adjusted basis for gain
- Result before other rules
- Recognized gain
Below gift-date FMV
- Basis used
- Gift-date FMV for loss
- Result before other rules
- Loss subject to deductibility rules
Between both amounts
- Basis used
- Test both bases
- Result before other rules
- Neither gain nor loss
Update the record and preserve the property’s use
Basis can change after acquisition. Capital improvements generally increase basis; depreciation allowed or allowable can reduce it. Selling costs generally reduce amount realized in a sale calculation. Write these separately to avoid deducting the same expense twice. If a personal asset is converted to business or rental use, the depreciation starting point can involve the lower of adjusted basis and fair market value at conversion, while other gain/loss computations require their own rules.
Inherited property is not universally eligible for a basis step-up. The general fair-market-value rule can step basis down as well as up, and income in respect of a decedent does not receive that same adjustment. A later sale also needs holding-period and character analysis. Use this page to establish and adjust basis; use the capital-gains lesson to finish the holding-period, recognition and netting decisions.
Original worked example
The gift-basis gap
A donor’s adjusted basis is $15,000. Gift-date fair market value is $11,000. The recipient sells for $13,000. Assume no gift-tax adjustment, selling costs or later basis changes.
- 1
Gain test: $13,000 - $15,000 = negative $2,000, so no gain.
- 2
Loss test: $13,000 - $11,000 = positive $2,000, so no loss.
- 3
The sale price is between the two basis amounts.
Result
Neither gain nor loss is recognized.
Using only the donor’s $15,000 basis would incorrectly report a $2,000 loss.
Example sale: $13,000 falls in the middle
Illustrative zones, not a proportional price axis. Assumptions match the worked example.
Apply the method to different facts
Original worked case 2
Change the price on the same gifted investment
A donor’s adjusted basis in investment land is $24,000 and gift-date fair market value is $18,000. Compare later net sale proceeds of $29,000, $21,000 and $15,000. Assume no gift-tax adjustment or later basis changes.
- At $29,000, subtract the $24,000 gain basis: $5,000 gain.
- At $21,000, the gain-basis test yields a loss and the loss-basis test yields a gain: neither is recognized.
- At $15,000, subtract the $18,000 loss basis: $3,000 loss, subject to applicable investment loss rules.
The outcomes are $5,000 gain, no gain or loss, and $3,000 loss. A single-basis shortcut cannot produce all three correctly.
Mistakes to catch
- Using fair market value for every gift.
- Calling inherited basis a guaranteed step-up when value could have fallen.
Check your understanding
What happens if the same gifted asset sells for $18,000?
Under the same assumptions, use the $15,000 gain basis: $18,000 - $15,000 = $3,000 gain. A sale for $9,000 instead uses the $11,000 loss basis and gives a $2,000 loss before other limits.
2. Purchased investment land costs $40,000 plus $1,500 capitalizable acquisition costs. A $6,000 capital improvement follows. What is basis before sale?
Answer: $47,500, assuming no other adjustments.
Add acquisition cost and the capital improvement. A market-value change alone does not change cost basis.
3. Inherited shares have $9,000 date-of-death value and the decedent paid $14,000. Is the general starting basis always $14,000?
Answer: No. Under the ordinary inherited-property rule it is $9,000, assuming no exception or alternate valuation.
The general rule can reduce basis as well as increase it. Carryover gift basis and inherited-property basis are different regimes.
Put the rule into practice
Create an account for EA practice, then work on the decisions you missed.
Sources and scope
Source check: . IRS and PSI materials support the factual rules. Worked cases and suggested study sequences are original educational examples, not official exam questions or IRS study requirements.
- PSI SEE Candidate Information Bulletin
Exam format, scored domain allocations, tested tax year and exam procedures; see Study Materials and Examination Content Outlines.
- IRS Publication 551 (December 2025)
Cost, adjusted, gift and inherited basis; see Basis Other Than Cost.
- IRS Publication 559 (2025)
Final individual return, estate income and income in respect of a decedent.
Use the version applicable to your testing window. Live IRS pages can advance to a later tax year. These notes are exam study material; examples state simplifying assumptions.