The person giving away the house (the donor) is responsible for paying any federal gift tax, not the recipient. While for 2025, gifts over $19,000 per recipient must be reported to the IRS on Form 709, taxes are generally only owed if the total lifetime gifts exceed $13.99 million.
The Internal Revenue Service (IRS) does not classify a gift received as income, so when you receive the house, you will not pay taxes on it. Only when you sell the gifted property is it subject to taxation. The taxes you pay will depend on whether you decide to sell the house you were gifted at its FMV or higher.
Basis of Property from Gifts
Generally, a taxpayer who acquires property by gift takes a basis in the property equal to the donor's adjusted basis in the property at the time of the gift (referred to as transferred or carryover basis).
Drawbacks to gifting real estate
If the person who receives the gifted property (the donee) sells it after holding it for more than 24 months, the profit will be taxed as long-term capital gains at a rate of 12.5%.
You can avoid capital gains taxes on inherited property by minimizing the time for appreciation. Selling immediately after inheritance typically results in minimal capital gains tax because there's little time for the property to appreciate beyond its stepped-up basis.
Leaving the House in Your Will
The go-to method for passing your home to your children is to leave it to them in your will. By allowing them to inherit the property, your children will pay fewer capital gain taxes if they choose to sell the house.
The popular "5 Gift Rule" focuses on meaningful giving with categories: Something they want, something they need, something to wear, something to read, and something to experience/do, ensuring a mix of joy, practicality, and lasting memories, while general gift-giving rules emphasize thoughtfulness, personalization, considering the recipient's interests, keeping it appropriate for the occasion, and presentation.
At a glance:
The gift giver pays any gift tax owed, not the receiver. You don't have to report gifts to the IRS unless the amount exceeds $19,000 in 2025. Any gifts exceeding $19,000 in a year must be reported and contribute to your lifetime exclusion amount.
CGT doesn't usually apply at the time you inherit the dwelling, however it will apply when you later sell or dispose of the dwelling, unless an exemption applies. if you dispose of the inherited property within 2 years (or the within an extension period) of the deceased person's death.
The holding period of purchased property begins on the date the property is acquired. Property acquired as a gift generally retains the same cost basis it had in the hands of the donor at the time of the gift. This is referred to as carryover basis. The recipient of the gift usually assumes the donor's holding period.
You should avoid gifting items that send the wrong message (like self-help books or cleaning supplies), are deeply personal (like toiletries), carry cultural taboos (sharp objects, clocks, mirrors), are overly practical/boring (kitchen appliances), or create unwanted obligations (subscriptions). Personalized items that aren't to the recipient's taste or gifts that imply judgment (like diet-related items) are also poor choices, alongside items with potential bad luck connotations like handkerchiefs or empty wallets.
The "6-year rule" for Capital Gains Tax (CGT) in Australia allows you to treat a former main residence as tax-exempt for up to six years after you move out, even if you rent it out, enabling you to avoid CGT on any growth during that period. You qualify by moving out, choosing to treat it as your main home for tax, and can reset the rule by moving back in. If you rent it out for longer than six years, only the portion of the gain after the six-year mark becomes taxable.
Here are four potential options you may want to consider:
The best way to avoid capital gains tax on gifted property is to live in the property for at least 2 of the 5 years before you sell. The IRS allows single tax filers to exclude the first $250,000 in gains from the sale of your home (or up to $500,000 for married couples filing jointly).
The "36-month rule" for capital gains tax (CGT) primarily refers to the UK's Principal Private Residence (PPR) Relief, where the final 36 months (or 9 months for most) of a property's ownership period are tax-exempt, even if not lived in, provided it was a main home at some point. In the US, the relevant rule for home sales is the "2-out-of-5-year rule" for the Section 121 exclusion, allowing up to $250k/$500k profit tax-free if owned and used as a main home for 2 of the 5 years before sale, with exceptions for unforeseen circumstances.
Give more money away
Lifetime gifting is a straightforward way to begin reducing your IHT bill. By gifting money during lifetime, that would have been part of an inheritance anyway, you reduce the size of your estate so that there is smaller amount subject to IHT on your death.
If you transfer cash or other assets through a gift deed, gifts valued up to ₹50,000 would be fully tax-free in the recipient's hands. However, if the value exceeds ₹50,000, the full value of the asset would be taxed in the recipient's hands under the head 'Income from other sources.
The capital gains tax implications for the recipient of a gifted home are directly tied to the property's basis and the donor's holding period. If the recipient sells the home, they will owe capital gains tax on the difference between the sale price and their basis in the home.
The 20% rule for capital gains refers to the highest federal tax rate for long-term capital gains, applying to higher income brackets when you sell investments (stocks, real estate) held for over a year, with lower rates of 0% and 15% for lower incomes, and even higher rates for special assets like collectibles. This rate kicks in for single filers earning over approximately $492,300 (2024) or $533,401 (2025), and higher for joint filers, making holding assets over a year a key tax strategy.