Selling a property/gift tax

[Alamo]

What is the name of your state? New York

First thanks for any advice on what I hope is a fairly straightforward issue.

About 20 years ago I purchased a co-op apartment in NYC for $85,000 so that my son could use it. I have never been resident in it. I named my son as co-owner so he would have some standing in the building. About five years ago he moved out and the apartment was sub-let. I never received any income from the sublet. The apartment will be sold over the next six to eight months and I am estimating the apartment will go for something in the range of $325 to 350K. I will let my son have all the proceeds from the sale.
My question is as I am still officially a co-owner of the property am I liable to tax even if I don't make any income from the sale. Will I be subject to capital gains or gift tax? Will my son be subject to tax as he will be receiving my share of the sale proceeds? And if there are any tax implications is there any way to mitigate the tax burden?

Again many thanks for whatever help you can offer.

 

[FlyingRon]

There's definitely non-excludable capital gain to be had here. It will need to be apportioned between the owners and tax paid on it. In my experience, the IRS doesn't get too wrapped up as to who pays it as long as one of you (or a combination) pay the tax on the total amount of the gain.

The only way I can imagine to mitigate the gain is that if it would qualify as a business/investment, you could roll it into a like-kind investment. (Which could be just about any rental real estate). The gain isn't really excluded, just rolled forward onto the new property so you don't owe anything immediately. There are strict rules as to how this must be handled, so if you want to try, I'd advise having a person versed in such transfers handle it so you don't screw it up and suddenly expose yourself to a lot of immediate tax liability.

 

[Taxing Matters]

My question is as I am still officially a co-owner of the property am I liable to tax even if I don't make any income from the sale.

Your share of the gain will be included in your income. Your share will be based on what portion of the property you own. Unless the deed specifies otherwise it is likely that you and your son each own half of the interest in the property. When you gave your son his interest in the property he also got the same share of your basis. So if you gave him an interest in half the property then he also got 50% of the basis you had in it at the time you gave him that half interest. You'd each then get 50% of the sales proceeds and determine your gain by subtracting your basis from your net sales proceeds.

So, for example, if your basis in the property at the time you gave him his interest in the property was $85,000 and you gave him a half interest in it then he got $42,500 of basis in his half share, and your basis in your half share would also be $42,500. Then if you sell it today for $350,000 (after sales expenses), that means each of you get allocated $175,000 of the sales price. If your basis has not changed at all and is still $42,500 then your gain on the sale is $132,500. It would be a long term capital gain, taxed at the lower long term capital gains rates. Your son's basis will be reduced by the depreciation he took (or could have taken) on the rental of the apartment. As he moved out approximately 5 years ago he would have little, if any, of his gain excluded under the rule that allows for exclusion of gain on the sale of a principal residence.

Then since you are effectively giving your son a gift of the $175,000 you get from the sale you'll have to file a federal gift tax return and reduce you lifetime unified credit against federal estate and gift tax. There would be no actual gift tax to pay, however, unless you have fully exhausted that credit. As that credit currently exceeds $11 million, unless you've given away $11 million in gifts already you won't have to worry about paying gift tax. You still do need to file the return however.

There would be NY income tax for both of you to pay, too.

As FlyingRon notes, if you were interested in replacing that apartment with another investment/rental property you could do a like-kind exchange and defer the gain you realize on the sale of this one. You'd want to get assistance from a tax attorney or other professional experienced in doing like kind exchanges to get it right. If you blow any of the steps in the process then the like kind exchange fails and the gain is taxable now instead of getting deferred.

In my experience, the IRS doesn't get too wrapped up as to who pays it as long as one of you (or a combination) pay the tax on the total amount of the gain.

The IRS will indeed care here. How the sales proceeds are allocated does make a difference in the tax consequences.

 

[davew9128]

The IRS will indeed care here. How the sales proceeds are allocated does make a difference in the tax consequences.

Assignment of income cases still appear in court and people still try to challenge it.

 

[FlyingRon]

Also note that since the property was rented, there's going to be depreciation concerns (whether you took them or not).