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  1. #1
    russmz73 is offline Junior Member
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    Capital gains on sale of gifted property

    What is the name of your state (only U.S. law)? Washington

    House on 20 acres appraised at 300K is going to be sold. House is unoccupied. Property is owned by elderly father who wants to give the proceeds to children.

    Father inherited property upon death of his mother 4 years ago. Property values have dropped in the interim. His cost basis is the value of the property upon inheritance, so probably greater than the current value, correct??

    Children want to have the property deeded to them and then sell the property themselves so that the father doesn't need to deal with realtors, the sale particulars, etc. Father is fine with that.

    I say they are going to be hit with capital gains tax for the full value of the property once they sell it and that the father should sell it and bank the proceeds - then issue children a yearly gift up to the amount permissible without taxation.

    Please let me know if this would be sound advice for the family to follow or if you have other suggestions.

    Thanks!
    Last edited by russmz73; 05-07-2010 at 10:32 AM.
  2. #2
    FlyingRon is offline Senior Member
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    I don't recommend people giving away assets while they are still alive. There's far too much possibility that they may need it (and for seniors it can screw their medicaid eligibility).

    Correct, his basis stepped up at the time of his mother's death.
    You are incorrect that they will owe the capital gains on the whole value of the property. They get the donor's basis (so it makes no difference capital gains wise which way this is done).

    If he wants someone else to deal with the sale, he can give a power of attorney rather than having to give up ownership.

    Depending on what else he has to give away or in his eventual estate, there's no "tax" issue on the gift. Anything in excess of $13,000 a year (to any one recipient) comes off a lifetime (currently) million dollar exclusion before any gift tax is due.
  3. #3
    russmz73 is offline Junior Member
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    Thanks for the response, FR.

    I just need to make sure I've got this right.

    "They get the donor's basis (so it makes no difference capital gains wise which way this is done.)"

    So if the father gifts the property, the children can use whatever his basis is upon reselling to determine their gain (or loss)? I had understood that they could only do that if the property was inherited.

    "Anything in excess of $13,000 a year (to any one recipient) comes off a lifetime (currently) million dollar exclusion before any gift tax is due."

    (There are no other gifts involved.) So the father can gift each child up to a million with no tax penalty right now - and up to 13K per year after the million is reached - with no tax consequences for the kids?
    Last edited by russmz73; 05-07-2010 at 11:40 AM.
  4. #4
    tranquility is offline Senior Member
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    When one receives a gift, his basis is that of the giver. So I agree that it is likely there would be no income tax on the sale. (I say likely as there are lots of things which could change that. I'm just working with the facts given.)

    The lifetime gift exclusion is a million *total* not per recipient. No gift tax reporting for $13,000 per recipient per year, but the exclusion is for the total gifted without reference to the unreported amounts.
  5. #5
    russmz73 is offline Junior Member
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    OK, thanks, I think I'm getting it now.

    The father pays no gift tax up to $1,000,000 lifetime, but the 13K per year per giftee isn't considered part of that amount, right? It's just an extra amount he can give away.

    And the cost basis is the father's, whether it's gifted to the kids to sell or he sells it himself.

    If inheriting the property later, the children would be getting a cost basis stepped up to current market value, correct? Or would they also acquire the father's cost basis? I'm thinking there must be some advantage to inheriting over receiving it as a gift.
  6. #6
    FlyingRon is offline Senior Member
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    Yes, one million lifetime per DONOR. $13,000 per year per donor per recipient.
    And you still get to deduct the $13,000 from the stuff that gets applied to the million.

    Yes, when a person who owns property dies, it steps up to the value at the time of his death.

    When a property is given away whatever basis the donor has is what becomes the basis of the recipient.

    When a property is sold (legitimately), then the purchaser basis becomes the sale price.

    Yep, death is a great tax dodge.
    The other one is if the owner actually lives in the house as their primary residence but you said the house was vacant (and presumably was not dad's residence in the previous five years).
  7. #7
    tranquility is offline Senior Member
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    Actually, the step-up in basis rules changed this year. For a father to child inheritance, the estate can step up $1.3 million in value. Most think it is the executor's choice if there are more than that in assets.
  8. #8
    anteater is offline Senior Member
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    Just to toss in a "but"....

    Father inherited property upon death of his mother 4 years ago. Property values have dropped in the interim. His cost basis is the value of the property upon inheritance, so probably greater than the current value, correct??
    In keeping with the "You can gift a gain, but you can't gift a loss" maxim, if father gifts and the kids sell, the cost basis is probably going to be the fair market value when the gift is made.

    Right?
  9. #9
    tranquility is offline Senior Member
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    Yes, the basis of a gift is the donor's basis or the FMV at the time of the gift--whichever is lower.

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