Ask for basis records before accepting the deed
A parent gives a commercial building to an adult child who will use it in a business. The gift may remove the need for a purchase down payment, but it does not generally create a fresh basis equal to appraised value. IRS Publication 551 explains the carryover-basis framework for gifts, including special rules where value is below the donor's basis and adjustments for certain gift tax. For business property, depreciation basis generally follows the donor's adjusted basis with applicable adjustments.
Request the donor's records as part of the transfer, not at the first filing deadline. A deed and appraisal establish important facts, but they do not show historical depreciation, improvements, casualty adjustments, or prior nonrecognition transactions. Also determine whether debt is transferred and whether the arrangement is wholly a gift. A transfer involving consideration or liabilities may require additional analysis. The recipient's first question should be what tax history comes with the property.
Compare gift value with depreciation basis
Suppose a hypothetical donor gives a building worth $900,000, excluding land, with $260,000 of adjusted tax basis after prior depreciation. Assume no debt, no gift-tax basis increase, and a straightforward qualifying gift. The recipient generally does not begin depreciating $900,000. The $260,000 carryover amount and applicable depreciation rules form the starting point for the recipient's schedule. New improvements funded by the recipient need their own records and treatment.
The difference is material when the recipient compares the gift with buying a different building. The gifted property may provide substantial equity and low acquisition cash demands while producing smaller deductions than a market-price purchase. Neither fact cancels the other. Prepare a cash and tax comparison using the property's operating costs, condition, and business suitability. An appraisal useful for gift reporting is not automatically the figure used for the recipient's depreciation. Keep those purposes clearly labeled in the transfer file.
Retain the dual-basis facts when value has fallen
When fair market value at the gift date is below the donor's adjusted basis, gain and loss calculations can use different starting amounts under the gift rules. Publication 551 explains that a sale between those figures can produce neither gain nor loss before relevant adjustments. Preserve both figures even when the immediate plan is to occupy the building for decades. Future sale reporting depends on facts that are easiest to document at transfer.
The recipient also needs the donor's depreciation history for later recapture analysis where applicable. A family spreadsheet showing only the donor's original purchase price is incomplete. Obtain prior returns and fixed-asset schedules, identify land and components, and reconcile any missing years. If ownership passes through a trust, entity interest, or estate rather than by direct gift of the property, identify that legal route first. A gift of shares in a property-owning company is different from a gift of the building itself.
Plan the operating handover as well as the tax handover
The new owner assumes practical responsibilities that may not appear in the gift documents. Review leases, deposits, insurance, maintenance contracts, property taxes, service connections, and lender consent. If the donor's business remains a tenant, put rent and responsibilities in a written agreement. A generous transfer can still create an immediate need for roof repairs, safety upgrades, or working capital. Inspect the premises before deciding how much free cash the gift creates.
Prepare a twelve-month property forecast with taxes, insurance, maintenance, debt service if any, and necessary improvements. Separate those cash needs from noncash depreciation. Agree who pays outstanding expenses around the transfer date and preserve settlement evidence. The recipient should understand which obligations are continuing and which belong to the donor. A transition plan can prevent family misunderstandings from becoming bookkeeping differences between the property owner and the operating business.
Give both owners the same permanent file
Keep the signed transfer documents, gift-date appraisal, donor basis rollforward, depreciation schedules, gift-tax reporting information, and liability analysis together. Reconcile the recipient's opening asset register with that file before claiming deductions. Record later improvements separately and retain the donor history through sale. Both parties should preserve copies, including the explanation of any basis adjustment. The gift is more useful when the business receives understandable records as well as valuable premises.
Sources & further reading
Consult the original guidance and its effective dates. These references support the educational discussion; their application depends on the specific facts.