giving cattle business to son

[oceanlovin'ea]

a new client has a schedule F on her return. She has some cattle. I think that her and her husband used to take care of the cattle. He died a year and a half ago. She is now thinking of just giving this business to her son. She has maybe 20 or 30 cows. She sells a few every year at the cattle auction.

She has property that she is depreciating and some fully depreciated. If she gives it to her son, do I report on 4797 and use zero as sales price? Anything else?

Linda

[Koss]

Schedule F

I'm flying by the seat of my pants on this one...

It's a sole prop. The business is closing. The assets of the business are going to be disposed of by way of gifting them to her son.

If you report the disposition on Form 4797 with a sales price of zero, it will generate a loss for assets that are not fully depreciated. I don't think you can claim a loss when the disposition is a gift.

You may not have to report the disposition at all. For purposes of depreciation, the assets are withdrawn from service.

Good luck determining the basis of those assets for the son...

Now, seriously, don't have a cow.



I know it doesn't sound quite right, but I think it's kinda like if you had a rental property and then you decided to occupy it as your principal residence. You withdraw the asset from service, stop depreciating it, and you simply stop filing Schedule E.

Or... what if, hypothetically, your client reached the point where she had only a few cows left, and decided to stop selling them, stop operating the "trade or business," and just use the last two or three cows for personal use? As in, say, keeping a couple cows on your land as pets, or keeping them only for personal consumption of the milk, or... keeping them for slaughter, with the intent of using the meat only for personal consumption?

You just shut down the Schedule F business, and you're done.

I think.

We could debate this one 'til the cows come home.




BMK

[Lion]

Gift Tax Return

Will parent need to file a gift tax return for his gift of the farm to his child?

[dyne]

In an excellent book entitled DIE BROKE the author says that a GIFT of a house or land, etc. is NOT subject to the $13,000 limitation that applies to all other gifts. I believe he is wrong and if the house, cows, etc. exceeds $13,000 in FMV, a gift tax return is required to be filed. Does anyone know for sure? KOSS? I have warned my clients in my yearly newsletters from time to time NOT to make a gift of a house to a son or daughter due to the dire tax consequences. Upon the later sale the son or daughter will only have the donor's basis (parents) and the
gain will be taxable. If the parents sell the house in most cases there will be NO taxable gain due to the
Section 121 exclusion. Or if the son or daughter inherit the house there will be usually a small gain or loss upon the sale. I have encountered this several times when my clients tells me that they sold the house which was gifted to them by their parents and I tell them they will probably owe several thousand dollars in tax as a result.They should have asked me first.

[Koss]

Farm or Livestock

It's late at night, and I'm not thinking clearly enough to respond intelligently to the question raised by Dyne about parents giving their house to their children.

But I'd just like to make a couple quick observations:

The original post made no mention of a house, or a farm, or any type of real property. The original post raised questions about a taxpayer who is giving her son a "cattle business." The post talked about cows--not a farm. The post talked about depreciable assets. Land is not depreciable.

Lion wrote:

Will parent need to file a gift tax return for his gift of the farm to his child?

Even though the original post makes no mention of a farm, Lion is nevertheless raising a valid question. Regardless of whether the assets of the "cattle business" are cows, land, buildings, milking apparatus, or whatever, there is a valid question as to whether a gift tax return would be required.

I think the answer to that question hinges on the value of the assets.

Is the client giving her son a "cattle business," or is she just giving her son some cattle? If she is giving him a "cattle business," what is she giving him besides the cattle? And what is the aggregate value of the assets in question?

The original post asked questions about how to report the transfer of these assets on Form 1040. The gift tax return is a totally different question. It is a valid question, but it is not the question that was asked.

I stand by my original answer. I don't think Form 4797 is appropriate in this case.

BMK

[Koss]

By the way...

When it comes to the distinction between real property and personal property...

Cows are the original, classic, archetypal, canonical example of personal property.

Personal property is also known as chattel.

It's an old Anglo-French word. In the distant past, the meaning of this word was...

cows.




BMK

[dyne]

It is my understanding that a gift of cows, house or almost everything else exceeding
$13,000 (or $26,000 for husband and wife doners) must be reported on a form 709 Gift
tax return. I have never prepared a gift tax return so am NOT an authority on it.
I believe there will be no gift tax due if the total estate is valued at LESS than
the lifetime GST of $3,500,000 for the year 2009. I feel sure that people who give
their residence to a son or daughter will NOT have prepared or file a form 709. If
anyone can find authority that a house is exempted from the gift tax rules, please
advise.

[Jiggers]

Cattle to son

a new client has a schedule F on her return. She has some cattle. I think that her and her husband used to take care of the cattle. He died a year and a half ago. She is now thinking of just giving this business to her son. She has maybe 20 or 30 cows. She sells a few every year at the cattle auction.

She has property that she is depreciating and some fully depreciated. If she gives it to her son, do I report on 4797 and use zero as sales price? Anything else?

Linda

1. "Husband died a year and a half ago". Was there a step-up in basis?

2. I assume there were other business assets: barn, pens, fence, water/feed troughs, tractor, etc. Was there a step-up in basis on the death of her husband?

3. I assume she pays property taxes on the farm, excluding her residence. Will she continue to pay those?

4. Why not gift the breeding cattle. Let her son continue to raise them, and depreciate them from the stepped-up basis. Let her son pay her for leasing the land, from the sale of the calves. Some percentage of the sale. She reports as rent income, less the depreciation on the barn, pens, fence, etc. This net income is not subject to SE tax.

Some good planning is needed, including a gift tax return, and some questions answered. But there are tax savings for all.