Basis in Residence

[Snaggletooth]

Sharon's father bought a residence closeby for $200,000.

He took ill in 2007 and sold his residence to Sharon. His remaining mortgage was only $65,000 and Sharon paid off this mortgage. Title to the property was thus transferred to Sharon for only $65,000.

Sharon's father died in 2008. When he died the FMV of the home was $180,000. She now owns the house, and is ready to rent it out. What is her basis in the property?

a) $65,000
b) $200,000
c) $180,000
d) None of the above

[BHoffman]

Sharon's father bought a residence closeby for $200,000.

He took ill in 2007 and sold his residence to Sharon. His remaining mortgage was only $65,000 and Sharon paid off this mortgage. Title to the property was thus transferred to Sharon for only $65,000.

Sharon's father died in 2008. When he died the FMV of the home was $180,000. She now owns the house, and is ready to rent it out. What is her basis in the property?

a) $65,000
b) $200,000
c) $180,000
d) None of the above

It is my understanding that the basis of rental property is either its FMV on the date is it available for rent or its adjusted basis, whichever is less. This is sticky because of the related party thing. It seems that Sharon was gifted the FMV of the property less the $65k mortgage. It also seems like Sharon might be stuck with $65k plus any improvements she has made since purchase as the basis.

[erchess]

My Two Cents

I think if you want to argue that there was a gift involved then you have to admit that a gift tax return was due. I assume one was not filed and therefore there is some kind of penalty that is growing month by month if there was a gift. Also, his ability to pass on other property without tax consequences is reduced but I suspect not by enough to hurt anything except that if his estate has been settled it may be necessary to re open it thus expanding the time the taxing agencies have to complain about this and anything else they may not like. So the question is whether 135K of additional basis is worth the extra trouble or perhaps whether you think the IRS is liable to raise the gift tax issues anyway.

My vote is no, leave basis at $65K and be done with it.

[kaimana]

I agree with Erchess...she purchased the property for $65K. She purchased the property before he died, FMV at that time has no bearing on this. kaimana