How Carryover Basis Works
When you receive property as a lifetime gift, you take over the donor's basis. If your parent bought a home for $300,000 and gifts it to you when it's worth $1,500,000, your basis is $300,000 — not $1,500,000.
If you later sell for $1,600,000, your gain is $1,300,000 — and both federal and California capital gains taxes apply to the full amount.
The Critical Contrast: Inherited vs. Gifted Property
Property received at death gets a stepped-up basis to fair market value. Property received as a lifetime gift gets carryover basis. This is one of the most important distinctions in California estate planning:
- Inheriting = stepped-up basis (gain eliminated)
- Receiving as gift = carryover basis (gain preserved)
When Lifetime Gifts Still Make Sense
Despite the carryover basis disadvantage, lifetime gifts can be appropriate for estate tax planning, Medicaid planning, or when the donor's basis is already high (little embedded gain). Coordinate with an estate planning attorney and CPA.
Disclaimer: This glossary entry is for general educational purposes only and does not constitute legal or tax advice. Laws change frequently and vary by individual circumstances. Consult a licensed California attorney or CPA for guidance on your specific situation.