Gifted house to son and S Corp business

[Absolut]

Father and Mother transferred Deed to their son on their Rental house in FL for $1.00 (they're saying they gifted it to him), also the parents were renting the house for the last few years before this happened so they've been depreciating it.

The son has never had to file income tax b/c there were no requirement they said. They did the gifting or transfer on 4/19/05, than on the same date the son sold the house for $903,000.00. So now the son has made $903,000.00, he shouldn't have to work but see below.

#1. Does the father & mother have to pay gift tax on the transfer? They say there is a unified Gift Tax they can take, which I read under Pub 950, says there is a Unified Credit of $345,000.00, and Exculusion Amount of $1,000,000.00. Is this true and how do I report this?

#2. If the son sold the house the same day they transferred, how do I figure what the FMV was the day it sold?

#3. Does Pub 950 mean that the Exculusion amount of $1,000,000.00, does not have to pay gift tax on this? Is this why the father doesn't think he has to pay gift tax on the transfer?

#4. I believe I still have to fill out form 709 for the parents, correct?

Here's another spin to the family affair:

They form a S Corp, Son, Mother & Father for a picture framing business. They haven't had any income, son invested $8,000.00 of his money to buy supplies, get a business phone, and internet access for business. Mother & Father don't want to draw a paycheck, can they do this? Can just the son draw a paycheck?

[OldJack]

#1. Does the father & mother have to pay gift tax on the transfer? They say there is a unified Gift Tax they can take, which I read under Pub 950, says there is a Unified Credit of $345,000.00, and Exclusion Amount of $1,000,000.00. Is this true and how do I report this?

Form 709, gift tax return, must be filed by the parents but no gift tax is due if the value of the gift is 1 million or less. The value of the gift is taken into consideration regarding estate tax when the parents die as the gift is still counted as part of their estate for purposes of calculating the estate tax.

#2. If the son sold the house the same day they transferred, how do I figure what the FMV was the day it sold?

The FMV would be the sale price. However, the sons cost basis to determine taxable gain would be the same as the parents tax basis (original purchase price plus improvements less depreciation if taken).

#3. Does Pub 950 mean that the Exclusion amount of $1,000,000.00, does not have to pay gift tax on this? Is this why the father doesn't think he has to pay gift tax on the transfer?

No gift tax if under the 1 million but will probably have an estate tax when parents die as they have used up a major portion of there estate tax exemption by not paying a gift tax.

#4. I believe I still have to fill out form 709 for the parents, correct?

Yes.

They form a S Corp, Son, Mother & Father for a picture framing business. They haven't had any income, son invested $8,000.00 of his money to buy supplies, get a business phone, and internet access for business. Mother & Father don't want to draw a paycheck, can they do this? Can just the son draw a paycheck?

Mom & Dad do not have to take a "salary" if inactive, but S-corp "profit/loss" is distributed as taxable income to each shareholder on a per share owned basis even though no money is taken out of the business. Son must take a salary as he is active in the business.

[Absolut]

Thank you and answer.

So if they originally bought it for $150,000.00 put X amount dollars into it, I than take the Depreciation and take it off this amount, and that would be his basis, correct? So he may actually pay a huge take on this? I'm also assuming I report this sale on 4797 correct?

Thank you for getting back to me.

[Brian EA]

So if they originally bought it for $150,000.00 put X amount dollars into it, I than take the Depreciation and take it off this amount, and that would be his basis, correct? So he may actually pay a huge take on this? I'm also assuming I report this sale on 4797 correct?

Thank you for getting back to me.

That's correct