Gifting a rental to your kids vs leaving it at death

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: A lifetime gift of a rental passes your low, depreciated basis and your future depreciation recapture to your children. Leaving it at death usually gives them a basis equal to fair market value, wiping out both. For most families below the $15 million estate tax exclusion for 2026, holding until death saves far more income tax than a gift. Gifts can still make sense for very large estates or for non-tax reasons.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage; the IRS pays for the roof (eventually, over 27.5 years). After enough years, the roof has been fully paid for by depreciation deductions, and your basis in the property is low. That low basis is exactly what makes the timing of passing the property to your kids so important.

This guide compares a lifetime gift with an inheritance, using IRS Publication 551, the gift tax rules and section 1014.

CPA Warning Label: Giving the kids the house today can hand them your entire tax bill tomorrow. Run the numbers before you deed it over.

Carryover basis

Under section 1015, a person who receives a gift generally takes the donor's adjusted basis (carryover basis), plus a portion of any gift tax paid on the appreciation.

• Appreciated property: your child's basis is your adjusted basis: original cost plus improvements minus all the depreciation you took.
• Property worth less than basis: a dual basis rule applies. For figuring a loss, the basis is the lower fair market value at the date of the gift; for gain, your adjusted basis. A sale in between produces neither gain nor loss.
• Holding period carries over (tacks) for appreciated gifts, so a sale is usually long-term.
• Depreciation: your child continues depreciating the building over the remaining recovery period on the carried-over basis. There is no new 27.5-year schedule on the full value.
• Mortgage: if the property is subject to a loan larger than your basis, the gift can be part sale, and you can have a taxable gain on the gift itself. This is a common trap; get advice before gifting leveraged property.
• Suspended passive losses: under section 469(j)(6), your suspended losses are added to the recipient's basis, not deducted by anyone.

Gift tax return

For 2026 the annual gift exclusion is $19,000 per recipient, per Rev. Proc. 2025-32. A rental is usually worth far more, so:

• You must file Form 709 for the year of the gift, due April 15 of the following year (extended with your income tax extension).
• Gift tax is rarely owed. The excess over the annual exclusion uses part of your lifetime exemption, which is unified with the estate tax: $15,000,000 per person for 2026 under the 2025 tax law, indexed after 2026, per the IRS.
• Spouses can split gifts, so a couple can give a child $38,000 a year before using exemption.
• You need a qualified appraisal to value the gift and adequately disclose it, which starts the statute of limitations on the value.
• Gifting fractional interests or LLC interests can allow valuation discounts. These are aggressive and closely watched, and the IRS challenges them; use an estate attorney and appraiser.

The child reports nothing at receipt; gifts are not income. Rent after the gift is theirs.

Step-up comparison

At death, section 1014 generally resets the basis to fair market value. Compare:

For estates under the exemption, the inheritance column wins on income tax almost every time. The gift column's main advantage, removing future appreciation from your taxable estate, matters only if your estate could exceed the exemption. See inherited rental property.

Recapture follows

A gift is not a sale, so you do not recognize recapture when you give the property away (section 1245(b)(1) and section 1250(d)(1) exclude gifts). But the recapture does not disappear. It transfers to your child:

• Unrecaptured section 1250 gain: the depreciation you took on the building is taxed at up to 25% when your child sells.
• Section 1245 recapture: if you did a cost segregation study, depreciation on the 5-, 7- and 15-year components is ordinary income when sold.
• Kiddie tax: if your child is under 19 (or under 24 and a full-time student) and has unearned income above the threshold, rental income and gains can be taxed at your rate under the kiddie tax.
• NIIT: your child pays the 3.8% net investment income tax only if their income exceeds the thresholds ($200,000 single).

At death, by contrast, section 1014 gives a new basis and the recapture potential from your depreciation is gone.

Example numbers

Illustration: Larry, age 72, owns a rental he bought in 2004 for $250,000 ($200,000 building). He has taken about $160,000 of depreciation. Adjusted basis: $90,000. Value today: $650,000. No mortgage. His estate is $3 million, well below the $15 million exemption. His daughter plans to sell in a few years. Assumptions: the property is worth $700,000 when sold, selling costs ignored, daughter in the 24% bracket and 15% capital gains bracket, no state tax.

Option A, gift now:

• Daughter's basis: $90,000, minus her own additional depreciation (ignored for simplicity).
• Gain on sale at $700,000: $610,000.
• $160,000 taxed as unrecaptured 1250 gain at her 24% rate (it is capped at 25%): about $38,400.
• $450,000 taxed at 15%: about $67,500 (some might reach 20% and the 3.8% NIIT depending on her income in the year of the sale).
• Federal tax: about $105,900.

Option B, inherit at death (value $700,000):

• Basis: $700,000. Gain on sale for $700,000: $0.
• Federal tax: $0.

The gift costs her about $105,900 in federal tax. Gifting also uses $631,000 of Larry's lifetime exemption ($650,000 minus $19,000), which does not matter here because his estate is far below the exemption.

When the gift can win: a family with an estate of $40 million and a rental expected to triple might gift to freeze the value outside the estate, where future appreciation could otherwise face a 40% estate tax. That is a planning question for an estate attorney.

Alternatives

• Hold and leave it by will or revocable trust for the step-up.
• Gift cash (up to $19,000 per child per year) instead of the property.
• Sell to the child on an installment note at market terms; see an attorney about the income tax and the related-party rules.
• Give the rent, not the property: helping a child with cash from the rental leaves the basis with you.

Before you deed it over: a checklist

1. Get your adjusted basis from your depreciation schedule, including improvements and any cost segregation.
2. Get a qualified appraisal as of the gift date.
3. Check the loan: is the debt larger than basis (part-sale risk), and does the mortgage have a due-on-transfer clause?
4. Review the title, insurance and liability exposure for the new owner. A child may need a new landlord policy.
5. Check the property tax effect. Some states reassess property on transfer; California, for example, limited the parent-child exclusion under Proposition 19, so a gifted rental may be reassessed.
6. Model the child's taxes: their bracket, the kiddie tax, the passive loss allowance at their income, and when they might sell.
7. Compare with keeping it until death and leaving it through a revocable trust.
8. File Form 709 by April 15 of the following year.

A middle path: retained interests

Some families use a family LLC, keeping the parent as manager while gifting minority interests. The gifted portion still gets carryover basis, and the portion the parent keeps gets a step-up at death. This adds complexity and appraisal costs and invites IRS valuation scrutiny, so it is mainly worth it for larger estates.

See also rental property capital gains with kids and kids tax strategies.