Is It Better to Gift or Inherit Property?

Deciding whether to transfer property as a lifetime gift or as an inheritance involves personal goals, financial security, and tax implications. The ideal path depends on the asset, the financial standing of the giver, and the needs of the receiver. The financial consequences for the recipient can vary based on how they acquire the property, making the choice a key part of estate planning.

The Role of Tax Basis

An asset’s tax basis is its value for tax purposes and is the starting point for calculating taxable gain or loss upon its sale. This value is determined differently if the property is received as a gift versus an inheritance. This distinction directly impacts the recipient’s capital gains tax if they sell the property, as a lower basis results in a larger taxable gain.

When property is received as a gift, the recipient assumes the donor’s original tax basis in a “carryover” basis. For example, if a parent gifts a home they bought for $100,000, the child’s tax basis is also $100,000, regardless of its current market value.

For inherited property, the heir receives a “stepped-up” basis, meaning the basis is adjusted to its fair market value on the date of the owner’s death. If the same home was worth $600,000 when the parent passed away, the heir’s tax basis becomes $600,000. This step-up erases the appreciation in value that occurred during the decedent’s lifetime for tax purposes.

If the property from the previous examples is sold for $650,000, the outcomes differ greatly. The child who received it as a gift has a $100,000 basis and a taxable capital gain of $550,000. The heir who inherited the house has a $600,000 basis and a taxable gain of only $50,000.

This difference shows why inheriting appreciated property is often better for the recipient from a capital gains tax perspective. The sale of either property would be reported on IRS Form 8949.

Federal Gift and Estate Taxes

The act of transferring property can trigger federal taxes for the donor or their estate. The federal government has a unified gift and estate tax system for large transfers of wealth made during life or at death.

For 2025, the federal gift and estate tax exemption is $13.99 million per individual, or $27.98 million for married couples. A person can transfer up to this amount over their lifetime and at death without incurring federal tax. Due to this high exemption, most estates do not owe federal estate tax.

The tax code also provides an annual gift tax exclusion of $19,000 per recipient for 2025. An individual can give up to this amount to any number of people each year. These gifts do not count against the lifetime exemption and do not require filing a tax return.

If a gift exceeds the annual exclusion, the donor must file a gift tax return using IRS Form 709. The excess amount is then subtracted from the donor’s lifetime exemption. For example, a $219,000 gift to one person creates a $200,000 taxable gift that reduces the lifetime exemption, but no tax is due unless the limit is exhausted.

If an estate’s value, plus lifetime taxable gifts, exceeds the exemption, the estate pays federal estate tax on the excess at a top rate of 40%. Because the exemption is so high, this tax affects very few people, and the recipient’s potential capital gains tax is a more common financial consideration.

State-Level Tax Considerations

State-level taxes can also influence the decision to gift or inherit property. These taxes operate independently of federal law and can apply even when no federal tax is due. Several states have an inheritance tax, an estate tax, or a gift tax.

An inheritance tax is paid by the heir who receives the property. The tax rates and exemptions often depend on the heir’s relationship to the decedent, with spouses and close relatives paying lower rates. As of 2025, the following states impose an inheritance tax:

• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

A state estate tax is paid by the decedent’s estate before assets are distributed. State estate tax exemptions are much lower than the federal exemption, so more estates are subject to state tax. For 2025, the following jurisdictions have an estate tax:

• Connecticut
• District of Columbia
• Hawaii
• Illinois
• Maine
• Maryland
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington

Connecticut is the only state with its own gift tax, which is integrated with its estate tax. Gifts that exceed the state’s annual exclusion can reduce the exemption available at death. This system prevents residents from giving away property to avoid estate tax.

For residents of these states, the analysis must include these potential costs. A state inheritance or estate tax can sometimes shift the financial advantage away from inheritance, particularly if the heir is not a close relative who qualifies for lower tax rates.

Important Non-Tax Factors

Beyond financial calculations, several non-tax factors can influence the decision. These personal considerations relate to the donor’s security, control, and long-term well-being.

A donor’s financial security is a primary concern. Gifting a major asset is an irrevocable transfer, meaning the donor can no longer use its value for retirement or unexpected expenses. Retaining ownership until death ensures the asset remains available for the owner’s needs.

Gifting property also means relinquishing control. The new owner can sell, mortgage, or alter the property without the donor’s consent. In contrast, planning for an inheritance allows the original owner to maintain full control over the asset during their lifetime.

The potential need for long-term care and Medicaid eligibility is another consideration. Medicaid has a strict five-year “look-back” period for asset transfers. If an individual gifts property and then applies for Medicaid within five years, they will likely face a penalty period of ineligibility.

The penalty’s length is based on the gifted asset’s value and can delay access to benefits for months or years. This issue does not arise for the donor when property is inherited.

Family dynamics can also play a role. An outright gift is immediate and can prevent future disagreements among heirs. Property passed through inheritance, however, must go through the probate process, which can be time-consuming and public but provides a structured legal framework for settling the estate.