Search Articles

Find Attorneys

How Do We Calculate Capital Gains on Gifted Property?

  • July 9th, 2025
Q
My aunt has an irrevocable trust with her home. However, she wants to dissolve that trust now and give the house to me and my wife to live in as our primary residence. What and how do I calculate the capital gains?
A

An irrevocable trust is a legal arrangement that generally cannot be easily changed or dissolved once it’s created. If your aunt’s home is held within such a trust, dissolving it to directly transfer the property to you and your wife as a gift can have tax implications.

As you may know, capital gains tax applies when you sell an asset (like a house) for more than what you originally paid for it. The difference between the sale price and the original purchase price (or “basis”) is the capital gain. (Note that the Internal Revenue Service (IRS) allows you to exclude a certain amount of capital gains if you are selling your own primary residence (Section 121 exclusion).)

Calculating Capital Gains on Gifted Property

Here’s a breakdown of how to calculate the capital gains in your scenario. Because this situation involves a gift rather than a sale, you need to use special rules to calculate the capital gain:

  1. Determine Your Aunt’s Basis. Your aunt’s basis in the property is what she originally paid for it, plus the cost of any capital improvements she made over the years. This is key to calculating capital gains when the gift of property is made.
     
  2. Determine the Fair Market Value. You will need to determine the Fair Market Value (FMV) of the home on the day your aunt gifts it to you. You may need to have the property appraised.
     
  3. Capital Gains if Sold. If you and your wife eventually sell the house, you will need to determine the difference between your aunt’s basis and the amount you sell the house for. If you sell the house for more than the FMV at the time you received the gift, you will be subject to capital gains on the appreciation after you receive the gift.
     

Important Considerations

  • Gift Taxes. While you might not have to pay capital gains tax on the gift itself, your aunt may have gift tax obligations. In 2023, the gift tax exclusion amount is quite high, but she would still need to report the gift.
     
  • Step-Up Basis. When you inherit property, you typically get a “step-up” in basis to the property’s FMV at the time of the decedent’s death. This is important in the context of tax planning for people with significant wealth. However, since this is a gift not an inheritance this does not apply.
     
  • Primary Residence Exclusion. When you sell your primary residence, you may be able to exclude a certain amount of capital gains from taxation. To use the primary residence exclusion, you must have lived in the house for two of the past five years.
     
  • Tax Professionals. Tax law is complex and can vary based on individual circumstances. It is very important to consult with an experienced tax advisor or estate planning attorney for personalized advice. They will be able to consider all relevant factors and provide specific guidance based on the specifics of your situation.
     
  • State Taxes. State capital gains taxes vary. You’ll want to find out the capital gains taxes for the state the home is located in.

Capital gains on gifted property involves understanding your aunt’s basis, the property’s fair market value at the time of the gift, and how these factors play into any future sale.

Local Elder Law Attorneys in Your City

Elder Law Attorney

Firm Name
City, State

Elder Law Attorney

Firm Name
City, State

Elder Law Attorney

Firm Name
City, State

Disclaimer: This is not financial or legal advice. The information provided here is for educational purposes and general information only. It is not a substitute for professional advice. Consult with a qualified tax professional, financial advisor, or attorney before making any decisions about your specific situation.


Last Modified: 07/09/2025
Medicaid 101
What Medicaid Covers

In addition to nursing home care, Medicaid may cover home care and some care in an assisted living facility. Coverage in your state may depend on waivers of federal rules.

READ MORE
How to Qualify for Medicaid

To be eligible for Medicaid long-term care, recipients must have limited incomes and no more than $2,000 (in most states). Special rules apply for the home and other assets.

READ MORE
Medicaid’s Protections for Spouses

Spouses of Medicaid nursing home residents have special protections to keep them from becoming impoverished.

READ MORE
What Medicaid Covers

In addition to nursing home care, Medicaid may cover home care and some care in an assisted living facility. Coverage in your state may depend on waivers of federal rules.

READ MORE
How to Qualify for Medicaid

To be eligible for Medicaid long-term care, recipients must have limited incomes and no more than $2,000 (in most states). Special rules apply for the home and other assets.

READ MORE
Medicaid’s Protections for Spouses

Spouses of Medicaid nursing home residents have special protections to keep them from becoming impoverished.

READ MORE
Medicaid Planning Strategies

Careful planning for potentially devastating long-term care costs can help protect your estate, whether for your spouse or for your children.

READ MORE
Estate Recovery: Can Medicaid Take My House After I’m Gone?

If steps aren't taken to protect the Medicaid recipient's house from the state’s attempts to recover benefits paid, the house may need to be sold.

READ MORE
Help Qualifying and Paying for Medicaid, Or Avoiding Nursing Home Care

There are ways to handle excess income or assets and still qualify for Medicaid long-term care, and programs that deliver care at home rather than in a nursing home.

READ MORE
Are Adult Children Responsible for Their Parents’ Care?

Most states have laws on the books making adult children responsible if their parents can't afford to take care of themselves.

READ MORE
Applying for Medicaid

Applying for Medicaid is a highly technical and complex process, and bad advice can actually make it more difficult to qualify for benefits.

READ MORE
Alternatives to Medicaid

Medicare's coverage of nursing home care is quite limited. For those who can afford it and who can qualify for coverage, long-term care insurance is the best alternative to Medicaid.

READ MORE
ElderLaw 101
Estate Planning

Distinguish the key concepts in estate planning, including the will, the trust, probate, the power of attorney, and how to avoid estate taxes.

READ MORE
Grandchildren

Learn about grandparents’ visitation rights and how to avoid tax and public benefit issues when making gifts to grandchildren.

READ MORE
Guardianship/Conservatorship

Understand when and how a court appoints a guardian or conservator for an adult who becomes incapacitated, and how to avoid guardianship.

READ MORE
Health Care Decisions

We need to plan for the possibility that we will become unable to make our own medical decisions. This may take the form of a health care proxy, a medical directive, a living will, or a combination of these.

READ MORE
Estate Planning

Distinguish the key concepts in estate planning, including the will, the trust, probate, the power of attorney, and how to avoid estate taxes.

READ MORE
Grandchildren

Learn about grandparents’ visitation rights and how to avoid tax and public benefit issues when making gifts to grandchildren.

READ MORE
Guardianship/Conservatorship

Understand when and how a court appoints a guardian or conservator for an adult who becomes incapacitated, and how to avoid guardianship.

READ MORE
Health Care Decisions

We need to plan for the possibility that we will become unable to make our own medical decisions. This may take the form of a health care proxy, a medical directive, a living will, or a combination of these.

READ MORE
Long-Term Care Insurance

Understand the ins and outs of insurance to cover the high cost of nursing home care, including when to buy it, how much to buy, and which spouse should get the coverage.

READ MORE
Medicare

Learn who qualifies for Medicare, what the program covers, all about Medicare Advantage, and how to supplement Medicare’s coverage.

READ MORE
Retirement Planning

We explain the five phases of retirement planning, the difference between a 401(k) and an IRA, types of investments, asset diversification, the required minimum distribution rules, and more.

READ MORE
Senior Living

Find out how to choose a nursing home or assisted living facility, when to fight a discharge, the rights of nursing home residents, all about reverse mortgages, and more.

READ MORE
Social Security

Get a solid grounding in Social Security, including who is eligible, how to apply, spousal benefits, the taxation of benefits, how work affects payments, and SSDI and SSI.

READ MORE
Special Needs Planning

Learn how a special needs trust can preserve assets for a person with disabilities without jeopardizing Medicaid and SSI, and how to plan for when caregivers are gone.

READ MORE
Veterans Benefits

Explore benefits for older veterans, including the VA’s disability pension benefit, aid and attendance, and long-term care coverage for veterans and surviving spouses.

READ MORE