Part-Gift Part-Sale: Basis and Gain Rules Explained

A part-gift part-sale (also called a bargain sale) occurs when you transfer property to someone for less than its fair market value, treating the shortfall as a gift. The IRS has strict rules for how basis is allocated between the sale portion and the gift portion—and whether the transaction triggers capital-gains tax, gift tax, or both depends on the relationship, the spread between price and value, and how the basis is carved up.

What makes it a part-gift part-sale?

The IRS treats any below-market sale as a two-leg transaction: a sale at the price you actually received, plus a gift of the difference between that price and fair market value. This split matters because it puts you in dual tax territory—capital gains on the sale leg, and potential gift tax on the gift leg.

The classic example: you own property with a fair market value of $500,000 and a cost basis of $200,000. You sell it to your daughter for $350,000. You have sold $350,000 worth and gifted $150,000 of value. That $150,000 gift counts toward your lifetime gift-tax exemption, and you owe capital-gains tax on the difference between your allocated basis and the $350,000 proceeds.

The relationship matters too. Sales between unrelated parties at a discount are usually just sales; the IRS doesn’t treat them as part-gifts. But family transfers or transfers to a charitable organization at below-market prices trigger bargain-sale rules.

How the IRS allocates basis in a bargain sale

The IRS uses the reduced-basis method to split your cost basis between the sale and gift portions:

1. Calculate the fraction: Sale Price ÷ Fair Market Value = your basis allocation ratio.
2. Multiply your total basis by that fraction to get the basis allocated to the sale.
3. The unallocated basis “escapes” and reduces the recipient’s stepped-up basis in the gift portion.

Worked example:

• Fair market value: $500,000
• Your cost basis: $200,000
• Sale price: $350,000
• Ratio: $350,000 ÷ $500,000 = 70%
• Basis allocated to sale: $200,000 × 70% = $140,000
• Gain on the sale: $350,000 − $140,000 = $210,000
• Remaining basis not allocated: $200,000 × 30% = $60,000 (this carried forward to recipient)

You recognize a $210,000 capital gain. Your daughter receives property worth $500,000 with a basis of $60,000 (the unused basis) plus, under stepped-up basis rules, the gift portion may step up at her receipt if the property receives a date-of-gift value adjustment—though this is contested and depends on her holding period.

Tax consequences for the donor

The seller must report the gain using Schedule D (capital gains and losses) or Form 8949 if the property is a security. The gain is taxable in the year of sale, computed using your allocated basis.

The gift portion—the difference between fair market value and sale price—counts toward your annual gift-tax exclusion and your lifetime gift-tax exemption. In 2024, you can gift $18,000 per recipient tax-free per year; anything above that eats into your lifetime exemption (currently $13.61 million, indexed annually).

If the property appreciates before the sale, you recognize appreciation only on the portion you actually sold (times the appreciation factor). Losses don’t work this way: if your basis was $500,000 and fair market value is only $350,000, and you sell it for $350,000, there is no loss because the IRS treats this as selling all $350,000 of fair market value—no allowance for loss in the non-sale portion.

Tax consequences for the recipient

The recipient’s basis in the property is typically the sum of the allocated basis from the seller plus any step-up in the gift portion. However, this is complicated by step-up basis rules, which apply only if the property is received by gift (not purchased) and only under certain holding-period or death scenarios.

Most commonly:

• Basis in the sale portion: The amount paid (the purchase price itself becomes basis for that portion).
• Basis in the gift portion: The donor’s unallocated basis (from the calculation above) PLUS a step-up equal to the appreciation in the gift portion at the time of transfer (if the property was held long enough and certain conditions are met).

This can be confusing. The simpler rule: the recipient takes a carryover basis in the gift portion (stepping up only the appreciation above the donor’s cost, and only if eligible), while the portion you paid for has a basis equal to your purchase price.

When a bargain sale is intentional

Sometimes, a part-gift part-sale is a deliberate estate-planning strategy. For instance, you may sell property to an irrevocable trust or to a family member at below-market price to freeze its value in your taxable estate while generating liquidity and transferring future appreciation outside your estate. Or you may use a qualified personal residence trust (QPRT) or a grantor retained annuity trust (GRAT) to achieve a similar effect with more favorable basis treatment.

The IRS has additional rules for these transactions under Section 1011-1 (the “bargain-sale-to-charity” rules) and Section 2512 (valuation of gifts for gift-tax purposes). If you’re doing this intentionally, documentation and a fair-value appraisal are critical.

Loss situations and the alternate approach

If you own property at a loss (your basis exceeds fair market value), a part-gift part-sale may not be wise. The IRS does not allow you to deduct the loss portion. Instead, the recipient inherits a low basis in the gift portion and later faces a large gain if they sell. A better approach is often to sell at fair market value first (loss deductible if at a loss) or to simply gift the property outright and let the recipient dispose of it at their own time, capturing the step-up in basis at your death if applicable.

Practical compliance notes

• Use a qualified appraisal to establish fair market value at the time of transfer. The IRS will challenge low valuations.
• File Form 709 (gift-tax return) if the gift portion exceeds the annual exclusion, even if no tax is owed (to start the statute of limitations).
• Keep records of your cost basis and the date of purchase. Basis allocation depends on this.
• Consider whether depreciation recapture applies (e.g., if the property is real estate with depreciation deductions claimed). The recapture tax may apply to the portion you sell at below cost.

See also