Gifting a Mortgaged Property: The Part-Gift, Part-Sale Rule
When you give away property that still has a mortgage or other debt attached, and the recipient agrees to take over that debt, the IRS splits the transaction into two pieces under the "part-gift, part-sale" rule (Treasury Regulation 1.1001-1(e)). The portion of the property's value covered by the debt the recipient assumes is treated as if you sold it to them; the remaining value — fair market value minus the debt assumed — is a true gift. This split matters most when the debt assumed exceeds your original cost basis in the property: that excess is treated as sale proceeds beyond your basis and triggers capital gains tax for you, the donor, even though you received no cash. If the debt assumed is less than your basis, there's no recognized gain and the whole transaction is essentially just a gift with a debt attached.
How the Split Works
| Portion | Tax Treatment |
|---|---|
| Debt assumed ≤ basis | No recognized gain to donor |
| Debt assumed > basis | Excess over basis taxed as capital gain |
| FMV − debt assumed | Treated as the gift portion for gift tax reporting |
The gift portion is reported using IRS Form 709 once it exceeds the annual exclusion ($19,000 per recipient for 2025), but that just uses up part of your lifetime gift and estate tax exemption (nearly $14 million in 2025) rather than triggering an actual cash tax bill for most people.
Frequently Asked Questions
Gifting property with debt attached, where the debt assumed by the recipient is treated as a sale and the rest as a gift.
Only when the debt assumed exceeds the donor's adjusted cost basis in the property.
Usually not in cash — it reduces your lifetime exemption instead, so most people owe nothing out of pocket.
※ Estimate only. Gift and estate tax exemption amounts change annually — consult a tax professional for your specific situation.