Gifting a Gardena Rental to an Adult Child: the Basis Trap

Published August 10, 2026

Handing a Gardena rental to your adult child while you're alive carries your low basis with it under section 1015. Wait and let them inherit it instead, and section 1014 wipes the built in gain out entirely. The annual gift exclusion for 2026 is $19,000 per recipient, and it doesn't change this trap.

The short answer

Gift a Gardena rental to your adult child while you're alive, and under section 1015 your child inherits your low purchase price basis, not the current market value. Wait and let them inherit it at your death instead, and section 1014 steps their basis up to fair market value on that date, erasing the built in gain. The annual gift exclusion is $19,000 per recipient for 2026. It shields the gift tax, not the capital gains problem.

Last verified: August 10, 2026

Two different taxes, and landlords conflate them

There is the gift tax, which is about whether you owe tax (or use up exclusion and exemption amounts) for making the gift itself. And there is capital gains tax, which is about what happens when the recipient eventually sells the property. The $19,000 annual exclusion for 2026, confirmed on the IRS gift tax FAQ page, only touches the first one. It has nothing to do with the second, and that second issue is the one that actually costs Gardena landlords money.

Carryover basis: what your child actually inherits

Under 26 U.S.C. section 1015(a), when you give real property to your child during your lifetime, "the basis shall be the same as it would be in the hands of the donor." Your child does not get a fresh basis equal to what the property is worth on the day you hand it over. They get your basis, meaning your original purchase price, plus improvements, minus any depreciation you deducted while you owned it as a rental.

Say you bought a Gardena rental decades ago for $150,000 and it is worth $650,000 today. Gift it to your adult child now, and their basis is your basis, roughly $150,000 (adjusted for any depreciation and improvements along the way). If they sell for $650,000 the week after you gift it, they owe capital gains tax on roughly $500,000 of gain, a gain that mostly happened while you owned the property, not them.

Section 1015(a) also has a quirk that matters if the property has lost value: if your adjusted basis is higher than the property's fair market value at the time of the gift, your child must use the lower fair market value figure specifically for calculating a loss on a later sale. That provision protects against manufacturing a paper loss by gifting depreciated property, and it rarely favors a landlord gifting an appreciated rental, but it is worth knowing the rule cuts both ways.

Step up at death: what the same rental becomes if you don't gift it

Contrast that with 26 U.S.C. section 1014, which governs property your child inherits from you rather than receives as a lifetime gift. Under section 1014, the basis of inherited property is generally reset to "the fair market value of the property at the date of the decedent's death." Using the same numbers, if your child instead inherits that Gardena rental after you die when it's worth $650,000, their basis becomes $650,000, not your original $150,000. If they turn around and sell it near that value, there is little or no capital gains tax to pay, because the step up erased the gain that built up during your lifetime of ownership.

| Path | Child's basis | Gain if sold for $650,000 |

|---|---|---|

| Lifetime gift under section 1015 | Carries over your original basis, roughly $150,000 | Roughly $500,000 of taxable gain |

| Inheritance at death under section 1014 | Stepped up to fair market value at your death, roughly $650,000 | Little to no gain if sold near that value |

Where the annual exclusion actually fits in

The $19,000 figure, confirmed on the IRS site as the annual exclusion per donee for both 2025 and 2026, lets you give up to that amount to any one person in a year without filing a gift tax return or using any of your lifetime gift and estate tax exemption. A Gardena rental worth hundreds of thousands of dollars is nowhere near that threshold as a single gift; transferring it during your lifetime requires filing a gift tax return (Form 709) and using up a chunk of your lifetime exemption, or paying gift tax outright if you've exhausted that exemption. None of that changes the section 1015 carryover basis problem. A gift can be entirely exempt from gift tax and still saddle your child with a large capital gains bill down the road.

Why landlords still gift anyway, and when it can make sense

Basis carryover is a real cost, but it isn't the only variable. Gifting during your lifetime removes the property, and its future appreciation, from your taxable estate. It can also be the right move if your child plans to live in the property rather than sell it, since the built in gain only matters at a taxable sale. And if your own estate is likely to be near or above the federal estate tax exemption, the calculus between gifting now and holding until death gets more complicated, not simpler. This is exactly the kind of tradeoff, section 1015 carryover basis against a possible section 1014 step up, that needs to be run against your actual numbers, not a rule of thumb.

FAQ

Does the $19,000 exclusion apply per gift or per year?

Per recipient, per year. You can give $19,000 to your child and another $19,000 to their spouse in the same year under the confirmed 2026 figure, each without using any lifetime exemption, but a single rental property gift will still usually exceed that amount and require a Form 709.

If I gift a share of the Gardena rental every year to stay under $19,000, does that fix the basis problem?

No. Spreading the gift across years to stay under the annual exclusion only manages the gift tax reporting and exemption usage. Every fractional interest your child receives still carries your original basis under section 1015, piece by piece.

Does depreciation I took while I owned the rental affect my child's basis?

Yes. Depreciation you deducted while you owned the property reduced your adjusted basis, and that lower adjusted basis is what carries over to your child under section 1015, on top of the original purchase price and improvements.

Is there a way to get my child a stepped up basis without waiting for me to die?

Not through a lifetime gift. Some landlords consider structures like a retained life estate or certain trust arrangements that can affect estate inclusion and, in specific circumstances, basis treatment, but these are complex and fact specific. That's a conversation for an estate planning attorney, not a general rule.

What if I sell the rental to my child instead of gifting it?

A sale, even at a discount, is a different transaction with its own rules around imputed interest, part gift and part sale treatment, and possible gift tax exposure on the discounted portion. It does not automatically give your child a stepped up basis either.

This is general information, not tax or legal advice. Whether to gift a rental now or let it pass through your estate depends on your full financial and estate picture. Confirm the numbers and the structure with a CPA and an estate planning attorney before you transfer a Gardena rental to your child.

Topics: taxes, gift tax, section 1015, step up in basis, estate planning

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