How does capital gains tax work on property I received as a gift?

So I'm trying to figure out my tax situation for a house I was given as a gift by my grandparents about 8 years ago. They bought it in the late 70s for around $55,000 and gifted it to me when they moved to their retirement community. I've been living in it since then but now need to sell it to relocate for a job. The house is currently worth about $320,000 based on my realtor's assessment. I'm really confused about how the capital gains will work when I sell. Do I pay tax on the difference between original purchase price and selling price? Or is there some kind of adjustment since it was a gift? Do I get any exclusions since I've been living here? I really don't want to get hit with a massive tax bill I wasn't expecting. My parents mentioned something about a "step up in basis" but I think that's for inheritance, not gifts? I've tried researching online but getting conflicting information. Any help would be super appreciated as I'm trying to figure out my budget for the new place.

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21 comments

Hannah White

•8M

When you receive property as a gift, you generally take on the donor's original basis (what they paid for it) for capital gains purposes - this is called "carryover basis." In your case, that would be the $55,000 your grandparents paid in the 70s. However, there's good news! Since this has been your primary residence for at least 2 of the past 5 years, you likely qualify for the principal residence exclusion. This allows you to exclude up to $250,000 of capital gain ($500,000 for married couples filing jointly) from your taxable income. So if you sell for $320,000 with a basis of $55,000, your capital gain would be $265,000. After applying the $250,000 exclusion, you'd only potentially owe capital gains tax on $15,000. Much better than paying on the full amount!

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Hannah White

•8M

Absolutely correct! Any capital improvements made to the property while you owned it would increase your basis. Capital improvements include things like adding rooms, renovating kitchens/bathrooms, replacing the roof, adding central air conditioning, etc. (regular repairs and maintenance don't count). Keep in mind you'll need to have documentation of these improvements, so hopefully you've kept receipts and records. These costs get added to your basis, potentially reducing or eliminating the remaining taxable gain after the exclusion is applied.

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Mateo Silva

•8M

I was in an almost identical situation last year - inherited property with massive appreciation. I was totally confused about basis calculations and exclusions when selling. I tried reading IRS publications but they're basically written in another language. I found this service called taxr.ai (https://taxr.ai) that analyzes documents and explains tax implications in plain English. I uploaded my deed and some docs about the gift transfer, and it walked me through exactly how to calculate my basis and what exclusions applied. Saved me a ton in taxes because it showed me what improvement expenses I could add to my basis that I hadn't even considered!

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Mateo Silva

•8M

It absolutely works with property transfers - it has specific modules for gifts, inheritances, and partial transfers. It asked me questions about the specific situation and then gave tailored advice. As for accuracy, I actually did verify with my accountant afterward, and he was impressed with how thorough the analysis was. He said it covered all the bases correctly, including some obscure rules about holding period calculations that even he had to double-check. The main advantage was I understood everything clearly before meeting with him, so our paid time was much more efficient.

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Cameron Black

•8M

I have to admit I was wrong about AI tax tools. After my skeptical comment about taxr.ai, I decided to try it myself with a complicated rental property transfer situation. The step-by-step explanation it provided about how to calculate my adjusted basis was incredibly clear, and it pointed out several legitimate deductions I would have missed. I was especially impressed with how it explained the difference between the gift basis rules (carryover basis) versus inheritance rules (step-up basis) and how improvements affect each scenario. It even created a customized worksheet showing exactly how to report everything on the various tax forms. Definitely worth checking out if you're dealing with property basis calculations!

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Jessica Nguyen

•8M

If you're planning to call the IRS to get clarity on your gift basis situation, good luck! I spent WEEKS trying to get through to someone who actually understood property basis rules. Always on hold for hours only to get disconnected or transferred to someone who couldn't help. I finally used Claimyr (https://claimyr.com) after seeing their demo video (https://youtu.be/_kiP6q8DX5c). It got me connected to a real IRS agent in about 20 minutes instead of the usual endless hold time. The agent walked me through exactly how to document my basis and which forms to use for reporting the sale of gifted property. Huge relief to get official guidance directly from the IRS!

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Jessica Nguyen

•8M

It works by using their system that continuously redials and navigates the IRS phone tree until it secures a place in line, then it calls you when an agent is about to be available. You don't have to sit there redialing for hours or waiting on hold. I was definitely skeptical too, but it's not about "cutting the line" - it's about having technology handle the frustrating part of constantly calling back and waiting on hold. When I finally got connected, I spoke with a knowledgeable IRS representative who helped me understand exactly how to document my gift basis and capital improvements. Completely worth it for the peace of mind of getting official guidance.

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Ruby Garcia

•8M

I need to update my previous comment. After being super skeptical about Claimyr, I was desperate enough to try it yesterday for my gifted property basis question. I'm shocked to admit it actually worked! After weeks of failed attempts calling the IRS myself, I got connected to an agent in about 35 minutes who specialized in property transactions. The agent explained that I needed to file Form 8949 along with Schedule D to report my property sale, and confirmed I could include documented improvements to my basis. She also sent me to a specific IRS publication that addresses gift basis rules. Having an actual conversation instead of trying to interpret confusing IRS websites made everything clear. I hate admitting I was wrong, but this service actually delivered what it promised.

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Alexander Evans

•8M

Colorado actually follows the federal rules pretty closely for capital gains, so the federal exclusion should apply to your state taxes as well. This is a relief compared to states like California or Massachusetts that have their own twists. I'd still recommend checking with the Colorado Department of Revenue or their website just to confirm, but you should be in good shape. Make sure you keep all documentation of your basis calculations and improvements in case of any questions from either the federal or state tax authorities.

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Ian Armstrong

•4M

One thing that hasn't been mentioned yet - make sure you understand the holding period rules for gifted property. Since your grandparents owned the house since the late 70s and you've lived there for 8 years, you definitely qualify for long-term capital gains treatment (which has better tax rates than short-term). Also, don't forget that you can include certain closing costs from when you eventually sell in your basis calculation - things like title insurance, attorney fees, and some other selling expenses can reduce your taxable gain even further. Keep all your closing documents when you sell! Given that you're relocating for work, you might also want to look into whether any of your moving expenses could be deductible, though the rules changed significantly in recent years. It sounds like you're well positioned with the principal residence exclusion though - that $250k exclusion is huge for your situation.

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Christian Burns

•3M

This is really helpful information about the holding period and closing costs! I had no idea that selling expenses could be added to the basis calculation. When you mention "certain closing costs" - are there specific ones that qualify vs ones that don't? I want to make sure I'm not missing anything when I do sell. Also, regarding the moving expenses for work relocation - I thought those deductions were eliminated for most people after the tax law changes. Are there still some situations where they apply, or were you just mentioning it as something to double-check?

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