I overheard....

[strytus]

What is the name of your state? PA

Ok second posting for the night, but a completely new question. I'm so intrigued about taxes, but hate reading the books about them. Lemme stop rambling. I heard a lot of people talking about "gifts" from a parent or grandparent involving real estate. They always wander if they have to pay taxes on them. Now, is it possibly for the parents to sell their house to their child for lets say $100 bucks when it's actually worth 100K, and then have the child only pay taxes for only $100 bucks? I know this is too good to be true, and I think this can be done legally with cars, but why not real estate? Or maybe I'm wrong, and you can't do this legally with cars.

On a separate note which sparked this curiosity, I overheard some investor stating that he wanted to transfer his property over to a real estate land trust. Someone suggest to sell their property for $10 bucks (thereby paying a minimum amount of taxes) to a real estate land trust. Is this legal?

Thanks in advance
(I wish I knew a business lawyer friend)

[anteater]

1. The purchaser of an asset does not have a tax liability. (At least, not until they dispose of the asset.) The seller of an asset will have a taxable event and may or may not owe tax.

2. The recipient of a gift does not have a tax liability. (At least, not until they dispose of the asset.) The person making a gift may have a reportable tax event depending on the size of the gift and other factors. But, it is unlikely that the person making a gift will have a gift tax liability. Search around on the tax forum - this has been discussed many times.

3. Tax authorities will disregard these various shennaigans and treat transactions for what they are - sales/purchases at fair market value or gifts.

[BelizeBreeze]

and let's not forget about the ugly little idea of Fraud....

[tranquility]

You don't ask an easy question as there are many issues I won't go into. But, if I get the core of what you are asking, here goes.

Selling things between related parties is sometimes complex. There are many rules to follow to find out the correct treatment of the transaction. However, in the scenario you gave, the effect is probably bad.

If the property was gifted to the son, the son would take the basis of the property. Let's say dad bought it for $10K. The son turns around and sells it for $100K. Normally he would get to pay capital gains on the difference ($90K) between basis and realization. In the example, the son's basis would be $100 requiring a capital gains tax on $99,900 rather then the $90K. The only compensation is dad's lifetime gift amount is not reduced by $100K. No gift tax is payable unless the total amount given exceeds $1 million over the lifetime.

The same problem in the second scenario. Why would he want to do this? In addition, the trust will have depreciation only on the $10. If the property is used to purchase ownership in the trust, he's getting more than $10, but the valuation is difficult and the rules governing that are complex.