Inter Vivos Transfer of Property via Warranty Deed--Gift, Sale, or Inheritance?

[dparrishcpa]

What is the name of your state? Florida

My mother died Aug 12, this year. She owned 2 rental properties. In 1978 a title was drawn up transferring the properties to me, but this title was not recorded until her death was imminent, 11 days prior to her death. The purpose for the title transfer at that time was two-fold: 1) to allow me to take care of the administrative duties associated with the maintenance of these properties; and, 2) to secure the transfer of ownership to me upon her death, or imminent death.

My question concerns the issue of tax basis for federal income tax and the recognition of capital gain upon disposition of the properties. If valued at the current market price, the gain recognized upon sale within a limited time range would be minimal, or none. If valued at the 1978 market price, the gain would be substantial and, therefore, the tax would also be substantial.

All revenues from the properties have accrued to my mother since 1978. Should this transfer be recognized as a gift (1978 ?, 2007 ?), an inheritance (2007), or a sale (1978)?

If the title had not been recorded, and the property distribution were required to be carried out through probate court (she died intestate), would the stepped-up basis then apply? If allowable, I would consider either rescinding the title document (a Warranty Deed), or transferring the property back to her estate in order to "un-ring the bell", so to speak, so that the distribution of her assets may follow a more advantageous avenue for tax purposes--as it should have.

I am fully prepared to do (legally) whatever is necessary to fix this situation, if possible. It was always intended that the properties were to be my inheritance, and although it was not carried out correctly, the tax impact should reflect both the fact that I never took possession of these assets until the event of her death and also the true character of this situation (inheritance).

If anyone has some helpful advice, I would certainly appreciate hearing it. Thanks, in advance.

[abezon]

The helpful thing would have been to ask us these questions before recording the deed.

As things stand, the transfer is a gift. Your basis is whatever mom paid for the rental properties, less accrued depreciation. In other words, your basis is near $0. Go see an estate lawyer immediately. Whatever the probate & legal fees to reverse this, it will be cheaper than paying the capital gains tax when you sell. The cheapest thing would have been to put the properties in some kind of grantor trust. You'd have avoided probate costs, still had administrative powers, and gotten a step up in basis.