Form 709, FEDERAL GIFT TAX

[fusili3]

What is the name of your state?California.

My dad and I owned a house jointly from 1965 until 12/1/22. I signed my 1/2 of the house to him.

THE house was worth $900,000 on 12/1/22 and is in california. ON FORM 709, SCHED A, PART 1, line 1, COLUMN B, I will put my dad's name and the legal description of the house (parcel).

1. THE question is how do I prove that the house was worth 900k? DOES the mighty IRS take my word for it? I doubt it. CAN I GO TO zillow.com, realtor.com, and so on, take screenshots, and submit them as estimates of the worth of the house or should I get the written estimates from local real estate agents or should I use a LICENSED REAL ESTATE appraiser?

2. After I get the proof that you say is necessary, if the house is worth 900k, then I put down '450k' in form 709, sched A, Part 1, line 1, COLUMN 'F', for 'value at date of gift,' as I gave 1/2 of the house, right?

3.For 709, sched A, Part 1, line 1, column D, 'DONOR's Adjusted Basis of Gift,' I will put $10,000 because he and I paid $20,000 in 1965 and my adjusted basis is ½ of the cost, right?

4.Should I submit a photocopy of the original deed with the cost on it as proof?

THANKS. We made no improvements on the house besides painting it, adding a concrete driveway and concrete patio, and putting in 7 ceiling fans. I have none of those receipts, so I cannot include them as improvements to raise my cost basis, right?

Thanks again

 

[adjusterjack]

We have a tax attorney who participates here who will be along shortly. Stay tuned.

@Taxing Matters please see if you can help.

 

[fusili3]

Thanks!

 

[davew9128]

What do the instructions to the form tell you?

 

[Taxing Matters]

The IRS might take your word for it. That's because before you have to actually pay gift tax, you will have to have made so far over your lifetime at least $12.92 million in taxable gifts (known as the unified credit amount, and is adjusted every year for inflation) and (2) if your father dies with a large enough estate, the IRS will get back whatever shortfall there was in the gift tax on the estate tax return. Still, you want to file the Form 709 to lock in the value of the gift and you want that return to be accurate. While you don't need to submit all the evidence of value when you file the return, getting the evidence close to the time of the gift is stronger evidence than, say, an appraisal done years later. So get that together now and keep it in case of a future audit. You might want the help of an estate/gift tax attorney or appraiser experienced with valuation of part interests in property. The reason is that the value of your half interest in the house is likely not half the market value of the entire home. That's because if you tried to sell your one half of the house to an unrelated third party that unrelated third party is not likely to pay half the value of the home. The value of your half is less than that because the buyer has to share control of the house with your father, and that lack of sole of control for the buyer often means a discount on value of the partial share in the property. Getting a good appraisal from an appraiser knowledgeable about discounts for loss of control may be worthwhile. That appraisal will back up the value you put on the return should the IRS audit you and will lock in that control discount, leaving you more in future gifts that you can make tax free.

Forget about basis for the gift tax return. The estate and gift taxes don't take basis into account. Basis is necessary for income tax, as it is a major factor in computing the gain on the sale of the residence. Make sure that your father has copies of everything that impacts basis so he'll have it should he need to sell the home before he dies.

Why did you give him your half to begin with? In most cases I would not advise a client to make such a large gift to his/her parent. If the Congress lowers the estate and gift tax unified credit in the future, as some in Congress have proposed doing, that may backfire on you by using up unified credit that you could really use later. There is also the possibility that the IRS would challenge the transaction as not being a real gift. The details of the gift matter, and of course I don't have those facts. In any event, that's is a discussion I won't go into here as writing a whole tax treatise isn't really suitable for a message board forum. But I'll just note that if the IRS suspects that what is really going on here is not a real gift but simply a play to get you a basis increase in your property when your father dies, that's something the IRS would likely be interested in pursuing. Also, by giving him your share of the home, you are potentially exposing that to loss to your father's creditors. If he dies with, say, large medical bills you may find the house gets taken to pay them and you end up getting less back than had you simply kept your share of the home. Or if he's married and gets divorced, his ex-wife might get half the value of the home, severely reducing what you may stand to inherit. Again, details would matter a lot here.

Note, too, that even if the feds don't audit the gift tax return, it's possible that the valuation and basis issues come up for audit on either your or your father's income tax return, either for the federal government or the state. There are also issues here of valuation changes for CA property tax. I'm not all that familiar with those details since I don't practice in CA, but with a home with that much value that has been owned by the same people for nearly 60 years property tax would be something I'd be interested in sorting out were I in your position. It's possible that you may have unintentionally caused a significant increase in the assessed value of the home if you didn't check that out before making the gift.

 

[Taxing Matters]

1. THE question is how do I prove that the house was worth 900k? DOES the mighty IRS take my word for it? I doubt it. CAN I GO TO zillow.com, realtor.com, and so on, take screenshots, and submit them as estimates of the worth of the house or should I get the written estimates from local real estate agents or should I use a LICENSED REAL ESTATE appraiser?

Screen shots of value from internet web sites are not terribly accurate and the IRS isn't likely to give much credit to that. The best evidence is an contemperaneous appraisal from a real estate appraiser, though a well written statement of value from a knowledgeable real estate agent might be accepted. Again, generally you don't attach all the evidence of value to the return. You provide that in an audit.

2. After I get the proof that you say is necessary, if the house is worth 900k, then I put down '450k' in form 709, sched A, Part 1, line 1, COLUMN 'F', for 'value at date of gift,' as I gave 1/2 of the house, right?

It's probably less than half because of the lack of control I discussed in my earlier post.

3.For 709, sched A, Part 1, line 1, column D, 'DONOR's Adjusted Basis of Gift,' I will put $10,000 because he and I paid $20,000 in 1965 and my adjusted basis is ½ of the cost, right?

Your basis is what you put into the house. If you paid for half the cost of it, then that half is part of your basis. If you paid half of any improvements to the home, that too is part of your basis. But you don't include in your basis what you didn't pay for.

4.Should I submit a photocopy of the original deed with the cost on it as proof?

Not unless the instructions have recently changed to require that. I've not looked at the instructions in detail lately as I've not had any clients with gifts large enough to worry about gift tax recently. Again, just like for income tax, you don't attach copies of most records to your return. You provide that in any audit. As Dave noted earlier, look at what the instructions tell you to provide.

THANKS. We made no improvements on the house besides painting it, adding a concrete driveway and concrete patio, and putting in 7 ceiling fans. I have none of those receipts, so I cannot include them as improvements to raise my cost basis, right?

Of those items, only the concrete patio and driveway would be additions to basis. The ceiling fans technically aren't part of the basis of the house, but you would count their basis if they are included in the transfer of the home. The reason basis is put on the gift tax return is not for computing gift tax, but rather to support claims of basis on future income tax returns. If you don't have receipts to prove what you paid and no bank records, etc then perhaps you can contact the construction company that you used and a get a copy, if it was done somewhat recently anyway. you can still put down what you paid (if you can remember it). In an audit the IRS likely wouldn't allow the full value of the claimed costs without any documentation to back it up, but you should get something for it since it is pretty obvious that you had to spend something to have that work done. What the IRS allows just may be a lot less than you claimed, and in that event you might risk a negligence penalty. You have to decide what to do given that situation. Just be sure you don't lie about the cost and subject yourself to possible claims of fraud.

 

[fusili3]

THANKS for such detailed answers. I learned a lot and I realize that I have much work to do before 4/18/23.

1. To start with, I NEVER filed FORM 709 before, as I never made a gift. NEITHER DID MY DAD. The only guidance that I found in the 'instructions for FORM 709' booklet was to INCLUDE

'EITHER a qualified appraisal or a detailed description of the method used to deterimine the fair make value of the gift.'

I thus was pretty sure that the internet appraisals from real estate sites was not likely to be deemed qualified. I can get several real estate agents who regularly sell houses in my little neighborhood in LOS ANGELES to give estimates for free OR I could pay a licensed real estate appraiser. WOULD my getting 3 AGENTS to give estimates and then MY USING THE HIGHEST--and dividing it by 2--one be sufficient proof?


2. I NOW know, thanks to you, that the issue of control means that the gift is VERY LIKELY worth less than 1/2 of the FMV, but the IRS probably would not object if I overestmated the worth of the house, would it?

3. I gave him the house because he is healthier than I am, is not married, and has no other children, and I probably will predecease him. NEITHER of us has a will or other assets to speak of, so we figured that if I signed the house to him (GIFT), then he could open a living trust with me as beneficiary until I die, at which time the other name in the trust, HIS NEPHEW, gets the house and all of my dad's other assets, which are about $50,000, which is far less than the $12.92 mil lifetime exclusion. WOULD the IRS quibble with that reasoning/does it present problems?

4. MY dad gets social security and files a 1040. DOES he now have to claim the gift that I made to him as income on the fed form? I thought that only the donor claimed the gift and paid taxes on it, but if I am wrong, then please correct me.

5. California does not have gift tax, from what I have read, so no forms are necessary, unless somebody knows differently.

6. THE state assessor's office told me in writing that a transfer from parent to child and vice versa does NOT change the property tax assessment, which would have risen from $1000/year to over $10,000/year, if it had not been exempt. THANKS for asking! YOU certainly did not miss anything! You are sharp as a tack.

7. I cannot find any specific instructions for the 'donor's adjusted basis of gift,' question. AS the house was 20k and my 1/2 was 10k, then I will just Put
10,000
in sched A, PART 1, BOX D. I MEAN that I will not
try to add improvements to figure my cost basis, as I have no paper trail AND
I will not submit the 1965 BILL Of sale with the FORM 709 when I send it in, but I have it in a safe place, in case I am asked for it, such as in an audit.

8. WHEN I gather the appropriate evidence, do I put the FORM 709 in the same envelope as my 1040 on 4/18/23?

9. in an irrelevant question, I cashed some savings bonds last month and will have to pay estimated tax via FORM 1040 ES this year. DO I file FORM 1040 ES in same envelope with my 1040 on 4/18/23?

THANKS in ADVANCE. My head is still spinning from all of the valuabe info that you have given me

 

[LdiJ]

THANKS for such detailed answers. I learned a lot and I realize that I have much work to do before 4/18/23.

1. To start with, I NEVER filed FORM 709 before, as I never made a gift. NEITHER DID MY DAD. The only guidance that I found in the 'instructions for FORM 709' booklet was to INCLUDE

'EITHER a qualified appraisal or a detailed description of the method used to deterimine the fair make value of the gift.'

I thus was pretty sure that the internet appraisals from real estate sites was not likely to be deemed qualified. I can get several real estate agents who regularly sell houses in my little neighborhood in LOS ANGELES to give estimates for free OR I could pay a licensed real estate appraiser. WOULD my getting 3 AGENTS to give estimates and then MY USING THE HIGHEST--and dividing it by 2--one be sufficient proof?


2. I NOW know, thanks to you, that the issue of control means that the gift is VERY LIKELY worth less than 1/2 of the FMV, but the IRS probably would not object if I overestmated the worth of the house, would it?

3. I gave him the house because he is healthier than I am, is not married, and has no other children, and I probably will predecease him. NEITHER of us has a will or other assets to speak of, so we figured that if I signed the house to him (GIFT), then he could open a living trust with me as beneficiary until I die, at which time the other name in the trust, HIS NEPHEW, gets the house and all of my dad's other assets, which are about $50,000, which is far less than the $12.92 mil lifetime exclusion. WOULD the IRS quibble with that reasoning/does it present problems?

4. MY dad gets social security and files a 1040. DOES he now have to claim the gift that I made to him as income on the fed form? I thought that only the donor claimed the gift and paid taxes on it, but if I am wrong, then please correct me.

5. California does not have gift tax, from what I have read, so no forms are necessary, unless somebody knows differently.

6. THE state assessor's office told me in writing that a transfer from parent to child and vice versa does NOT change the property tax assessment, which would have risen from $1000/year to over $10,000/year, if it had not been exempt. THANKS for asking! YOU certainly did not miss anything! You are sharp as a tack.

7. I cannot find any specific instructions for the 'donor's adjusted basis of gift,' question. AS the house was 20k and my 1/2 was 10k, then I will just Put
10,000
in sched A, PART 1, BOX D. I MEAN that I will not
try to add improvements to figure my cost basis, as I have no paper trail AND
I will not submit the 1965 BILL Of sale with the FORM 709 when I send it in, but I have it in a safe place, in case I am asked for it, such as in an audit.

8. WHEN I gather the appropriate evidence, do I put the FORM 709 in the same envelope as my 1040 on 4/18/23?

9. in an irrelevant question, I cashed some savings bonds last month and will have to pay estimated tax via FORM 1040 ES this year. DO I file FORM 1040 ES in same envelope with my 1040 on 4/18/23?

THANKS in ADVANCE. My head is still spinning from all of the valuabe info that you have given me

If your basis in the house is only $10,000 then you do not have to fill out a form 709. Any individual can gift any other individual a gift with a value/basis of $17,000 or less without having to file a form 709. Since your dad's basis in your gift will be your original basis, then you don't have to file a gift tax form as that is less than $17,000.

You are correct that there are no tax implications for the receivers of gifts (other than their basis will be the same as your basis).

 

[fusili3]

LdiJ
Senior Member
wrote:

If your basis in the house is only $10,000 then you do not have to fill out a form 709. Any individual can gift any other individual a gift with a value/basis of $17,000 or less without having to file a form 709. Since your dad's basis in your gift will be your original basis, then you don't have to file a gift tax form as that is less than $17,000.
--------

YOUR answer surprised me because I was always under the impression that the FMV as listed in the FORM 709's SCHED A, Part 1, Line 1, Box F was the factor that determined whether a person must file the gift tax return; if the VALUE at date of gift was more than $17,000, then the person had to file.

YOU wrote that the Form 709's SCHED A, Part 1, LINE 1, Box D (Donor's adjusted basis of gift) determines whether the individual must file the FORM 709. I am shocked because, if my house had been worth, say, $10,000,000, then my portion of the value would have been roughly, but not exactly, 1/2 of that, or $5,000,000, and I still would not have needed to file a FORM 709 because my cost basis was only $10,000. WOW!

 

[davew9128]

LdiJ
Senior Member
wrote:

If your basis in the house is only $10,000 then you do not have to fill out a form 709. Any individual can gift any other individual a gift with a value/basis of $17,000 or less without having to file a form 709. Since your dad's basis in your gift will be your original basis, then you don't have to file a gift tax form as that is less than $17,000.
--------

YOUR answer surprised me because I was always under the impression that the FMV as listed in the FORM 709's SCHED A, Part 1, Line 1, Box F was the factor that determined whether a person must file the gift tax return; if the VALUE at date of gift was more than $17,000, then the person had to file.

YOU wrote that the Form 709's SCHED A, Part 1, LINE 1, Box D (Donor's adjusted basis of gift) determines whether the individual must file the FORM 709. I am shocked because, if my house had been worth, say, $10,000,000, then my portion of the value would have been roughly, but not exactly, 1/2 of that, or $5,000,000, and I still would not have needed to file a FORM 709 because my cost basis was only $10,000. WOW!

Yeah that post was inaccurate. The filing requirement has and remains based on the FMV of the gift.

 

[fusili3]

I see. I must file the FORM 709 as planned. THANKS!

 

[LdiJ]

Yeah that post was inaccurate. The filing requirement has and remains based on the FMV of the gift.

That is what I was instructed by a tax attorney. If you say that is wrong, I will research further for my own benefit.

 

[fusili3]

I am certainly leaning towards FMV, as it makes the most sense to me, but I am a writer, not a tax attorney or cpa. I would prefer cost basis, though, but the odds seem nil.

 

[Taxing Matters]

If your basis in the house is only $10,000 then you do not have to fill out a form 709. Any individual can gift any other individual a gift with a value/basis of $17,000 or less without having to file a form 709. Since your dad's basis in your gift will be your original basis, then you don't have to file a gift tax form as that is less than $17,000.

davew9128 is correct — the above answer was not right. It is the fair market value (FMV) of the gift, which in this case far exceeds the $17,000 annual gift tax exemption, that matters. Basis has nothing to do with whether the Form 709 return is required to be filed. FMV at the time of the gift is what counts.

 

[Taxing Matters]

I thus was pretty sure that the internet appraisals from real estate sites was not likely to be deemed qualified. I can get several real estate agents who regularly sell houses in my little neighborhood in LOS ANGELES to give estimates for free OR I could pay a licensed real estate appraiser. WOULD my getting 3 AGENTS to give estimates and then MY USING THE HIGHEST--and dividing it by 2--one be sufficient proof?

If they are all of about equal quality in the appraisal work, generally I would either use the middle appraisal or take the high and the low, divide by two, and use that for the FMV of the house. Then divide by 2 because you have just one half interest in it and apply the lack of control discount if I want to get it right on the nose. A lot of people don't do the control discount, and that's fine, especially when you don't have to write an actual check for tax to pay when filing the return. The IRS won't mind that the FMVof your half doesn't include that discount.

2. I NOW know, thanks to you, that the issue of control means that the gift is VERY LIKELY worth less than 1/2 of the FMV, but the IRS probably would not object if I overestmated the worth of the house, would it?

The IRS won't make a big deal over not including the control discount. But the return should be fairly accurate and you don't want to vastly overstate the value of your gift anyway as that unnecessarily eats up some of your unified credit.

3. I gave him the house because he is healthier than I am, is not married, and has no other children, and I probably will predecease him. NEITHER of us has a will or other assets to speak of, so we figured that if I signed the house to him (GIFT), then he could open a living trust with me as beneficiary until I die, at which time the other name in the trust, HIS NEPHEW, gets the house and all of my dad's other assets, which are about $50,000, which is far less than the $12.92 mil lifetime exclusion. WOULD the IRS quibble with that reasoning/does it present problems?

The IRS is not likely to have much of a problem with that. Usually giving the gift upstream to an ancestor raises issues because the ancestor is likely to die before the gift giving descendant does. You (unfortunately) don't seem to be in that situation.

4. MY dad gets social security and files a 1040. DOES he now have to claim the gift that I made to him as income on the fed form? I thought that only the donor claimed the gift and paid taxes on it, but if I am wrong, then please correct me.

The gift is not included in his income nor is there anywhere on the Form 1040 for him to report gifts (other than gifts received from foreign persons). So the gift won't cause him to have do anything different on his 1040 when receiving the home. It's what he does with the home after he gets it that will require him to potentially have to do more on the income tax return.

5. California does not have gift tax, from what I have read, so no forms are necessary, unless somebody knows differently.

Correct. It does not have a gift tax. Very few, if any, states now have a gift tax. The gift tax was never widely adopted by the states to begin with.

6. THE state assessor's office told me in writing that a transfer from parent to child and vice versa does NOT change the property tax assessment, which would have risen from $1000/year to over $10,000/year, if it had not been exempt. THANKS for asking! YOU certainly did not miss anything! You are sharp as a tack.

Thank you. At least you now know how the property tax will come out. Too many people overlook property tax when making gifts like this, and for some that results in a massive increase in property tax. Every state does property tax a bit different, so you always want to check that out.

8. WHEN I gather the appropriate evidence, do I put the FORM 709 in the same envelope as my 1040 on 4/18/23?

No. That results in a risk that one or the other return gets considered an attachment to the other and does not get processed. Then you are left with dealing with the IRS to straighten all that out. I've had to fix that kind of problems a number of times in my career when taxpayers mailed several returns in the same envelope. Although most of the time it works out okay, I just prefer to eliminate the risk that the ones I send will be the ones that get processed incorrectly. Saving a little postage is far less important to me than avoiding having to deal with the Service Center later on something that could have easily been avoided. Note, too, that the Form 706 and the 1040 might actually have two separate mailing addresses, in which case you'll have to mail them separately anyway.

9. in an irrelevant question, I cashed some savings bonds last month and will have to pay estimated tax via FORM 1040 ES this year. DO I file FORM 1040 ES in same envelope with my 1040 on 4/18/23?

No. Estimated tax payments are sent to a different address than tax returns.[/QUOTE]