• Internal Revenue Code §1015 governs the determination of tax basis for property acquired by gift.
• In most cases, the recipient of a gift assumes the donor’s adjusted basis rather than receiving a step-up in value.
• Carryover basis preserves built-in capital gains and depreciation recapture for future disposition.
• §1015 plays a critical role in evaluating lifetime gifting versus holding assets until death under §1014.
What It Is
Section §1015 provides that the tax basis of property acquired by gift is generally the same as the donor’s adjusted basis at the time of the transfer. This “carryover basis” rule means that unrealized appreciation and prior depreciation deductions are preserved and transferred to the recipient, who will recognize gain or depreciation recapture upon a future sale or disposition.
Historical Context
Section §1015 reflects Congress’s intent to prevent avoidance of capital gains tax through lifetime gifting. Without a carryover basis rule, donors could transfer appreciated assets to others and effectively erase built-in gain without a taxable event.
Over time, §1015 has remained a core component of the tax system governing lifetime transfers, standing in contrast to §1014’s step-up in basis at death. Together, these provisions form the foundation for strategic decisions around gifting, estate planning, and long-term asset transfers.
Commercial Real Estate Context
A commercial real estate investor gifts an interest in a property or partnership to a family member or trust as part of an estate or succession plan. Under §1015, the recipient inherits the donor’s basis, including accumulated depreciation. If the recipient later sells the property or interest, capital gains and depreciation recapture are calculated using the carryover basis, potentially resulting in significant taxable gain.
Potential Benefits & Limitations
Potential Benefits
• Lifetime Transfer Flexibility – Allows owners to transfer assets during life for succession, gifting, or trust planning purposes.
• Estate Tax Reduction – Gifting can remove future appreciation from the donor’s taxable estate.
• Integration with Trust Strategies – §1015 is frequently coordinated with irrevocable trusts and dynasty planning.
Potential Limitations
• No Step-Up in Basis – Carryover basis preserves built-in capital gains and §1250 depreciation recapture.
• Heir Tax Exposure – Future disposition by the recipient may result in substantial taxable gain.
• Complex Planning Tradeoffs – Gifting decisions require balancing income tax consequences against estate tax considerations.
Application
In practice, §1015 is central to evaluating whether assets should be transferred during life or held until death. While lifetime gifting can provide estate tax and succession benefits, it often comes at the cost of losing a potential basis step-up under §1014. Sophisticated planning weighs §1015 carryover basis implications alongside trust structures, §1031 strategies, and long-term family objectives to determine the optimal transfer approach.