I think they "step into the shoes" of the giftor.  The adjusted basis should be reported on the giftor's Form 709, but you might not have access to that.  If there were suspended PALs, I think they also get added to basis so that may be something else you want to look into.  Sounds like they do get the extended holding period but I'm fairly confident that does not constitute ownership for the purposes of Section 121.  The depreciation will be recaptured and taxed at ordinary rates not to exceed 25%.  If there's gain above that you might look at the provisions for a limited exclusion to see if they have a Darn Good Reason(TM) for selling with less than two years of ownership (change of employment, medical or "unforeseen circumstances" listed in the regs).

If you do qualify for a limited exclusion, I'm curious (and do not know) how the extended holding period might affect the determination of non-qualified use for Section 121.  I *think* the non-qualified use ties back to the ownership rather than the extended holding period (so by definition, no NQ use) but it's worth spending some time researching the Regs to make sure receiving the property as a gift does not bring with it also stepping into the NQ use period.

Rick