Property Sales, Basis and Capital Gains

How to find basis for purchased, gifted and inherited property, how long a holding period must run, how capital gains and losses net, and the special regimes: wash sales, home sale exclusion, like-kind exchanges, installment sales and related-party losses. This is one of the most computation-heavy areas of Part 1.

Income and Assets5 min read7 sections

Must-know for the exam

Inherited property takes a basis equal to FMV at death (or alternate valuation date) and is always long-term (IRC 1014(a); Pub. 551 (2025)).
Gift with FMV below donor's basis: use donor's basis for gain, FMV for loss; a sale in between gives no gain or loss (IRC 1015(a); Treas. Reg. 1.1015-1).
Long-term means held more than one year; the holding period starts the day after purchase (IRC 1222(3); Pub. 550 (2025)).
2025 0% capital gain rate applies up to taxable income of $48,350 single, $64,750 HOH, $96,700 MFJ (IRC 1(h); Rev. Proc. 2024-40 sec. 3.03).
The 15% rate ends at $533,400 single, $566,700 HOH, $600,050 MFJ and $300,000 MFS for 2025 (Rev. Proc. 2024-40 sec. 3.03).
Collectibles gain tops out at 28%; unrecaptured section 1250 gain at 25% (IRC 1(h)(4)-(6)).
Wash sale: buying substantially identical stock within 30 days before or after a loss sale disallows the loss and adds it to the new basis (IRC 1091(a), (d)).
Section 121 excludes $250,000 ($500,000 MFJ) of main home gain after 2 of 5 years of ownership and use; post-May 6, 1997 depreciation stays taxable (IRC 121; Pub. 523 (2025)).
Like-kind exchanges cover only real property after 2017: identify in 45 days, receive within 180 days or the return due date (IRC 1031; Treas. Reg. 1.1031(k)-1).
A nonbusiness bad debt is deductible only when totally worthless, as a short-term capital loss (IRC 166(d); Pub. 550 (2025)).

On this page · 7 sections

Traps that cost marks

Carrying over the decedent's cost basis as for a gift.
Using the donor's basis for both gain and loss.
Treating exactly one year as long-term.
Counting only the 30 days after the sale.
Using last year's threshold or the head of household figure.
Applying the 20% maximum to collectibles.
Excluding all of the gain when the home was a rental before it became the main home.
Excluding depreciation recapture along with the gain.

Why it matters on the exam

Gain or loss is amount realized minus adjusted basis, so every sale question is really a basis question. The SEE gives short fact patterns on gifts, inheritances, splits and wash sales, then asks for a number. It also tests the character and timing of gain: short or long term, excluded, deferred or spread over an installment note.

Net capital losses offset ordinary income up to $3,000 a year ($1,500 MFS), with the rest carried forward indefinitely (IRC 1211(b), 1212(b)).

Basis and holding period

How acquired	Basis	Holding period
Purchase	Cost	Starts the day after purchase
Inheritance	FMV at death or alternate valuation date	Always long-term
Gift, FMV at or above donor's basis	Donor's basis (plus part of any gift tax paid)	Includes donor's period
Gift, FMV below donor's basis	Donor's basis for gain; FMV for loss	Depends on which basis is used
Stock split or nontaxable stock dividend	Old basis spread over all shares

Premium

Every note. Every question. One pass.

5 more sections of this note are part of Premium.

Every section of every study note
750+ original questions across every outline topic
Full timed practice exams
A worked explanation on every question
Your full mistake bank and weak-area review

Unlock with Premium

From about US$12.42/mo on the Until-you-pass pass (12 months)

Exam-style questions

← Previous note: Retirement Income and Social Security All study notes

← All study notes

Income and Assets