Which is the correct way to report the transaction?

[AccTaxMan]

Suppose Father and son each owned 50% of a real property. The property has been sold with a $100,000 capital gain. Father let son take full amount of the proceeds. Which of the following is correct?

(1) Father and son each should report $50,000 capital gain. Father should then file a gift tax return for the $50,000 capital gain that he let his son take away.

(2) Son should report the full amount of $100,000 capital gain because he takes away the full amount. Father reports no capital gain because he did not receive any of the proceeds.

Which is the correct way to report the transaction, (1) or (2)?

[appelman]

Unless the property is transferred to son before sale...

I would think Alternative (1) would be correct. In either case a gift will be involved.

[Kram BergGold]

I select forr number 1

I agree, each report 50% and then dad does gift tax return.

[joanmcq]

I agree as well. Scenario 1.

[Roland Slugg]

Which is the correct way to report the transaction, (1) or (2)?

Neither is correct.

Each should report his half of the sale on his own tax return, resulting in a $50,000 gain on each return. Then the father should file a gift tax return reporting as a gift his 50% of the proceeds from the transaction. This will be more than the gain amount alone. For example, if the selling price (less selling expenses) was, say, $400,000, then the dad's gift was $200,000, not just $50,000.

[Gary2]

The base note says the overall gain was 100K but that doesn't mean each share was 50K of the gain. The bases don't have to be equal just because the ownership shares are.

[AccTaxMan]

The base note says the overall gain was 100K but that doesn't mean each share was 50K of the gain. The bases don't have to be equal just because the ownership shares are.

How do you determine the basis?

For example, father owned 50% of the property and son owned 50% of the property. But father paid the full amount of down payment when they purchased the property at $200,000.

(1) Father's basis is $200,000. Son's basis is $0.

(2) Father's basis is $100,000. Son's basis is $100,000. Father should file a gift tax return on the $100,000 that he paid for the son for the down payment.

(1) or (2) is correct?

[Gary2]

How do you determine the basis?

For example, father owned 50% of the property and son owned 50% of the property. But father paid the full amount of down payment when they purchased the property at $200,000.

(1) Father's basis is $200,000. Son's basis is $0.

(2) Father's basis is $100,000. Son's basis is $100,000. Father should file a gift tax return on the $100,000 that he paid for the son for the down payment.

(1) or (2) is correct?

You say down payment, which suggests a mortgage that complicates the entire scenario.

So let's simplify it first. Suppose at closing the father writes a check for $200K to the seller, but the deed or deeds result in each getting 50% ownership. You could treat it as a gift of $100K cash to the son, with gift tax and each getting a basis of $100K. Or you could treat it as a gift of property for which the father's basis of $100K is equal to the fair market value (assuming it was a FMV purchase), in which case there's still a gift of $100K while the rules for basis of a gift in this case give the son a basis of $100K. In other words, the same result.

But that's not the only plausible scenario. Suppose the father buys the entire property for $100K. Five years later, they get an appraisal, and the son buys half at a FMV of $75K for that half. The father recognizes $25K of profit, keeping a basis of $50K in the rest. The son, on the other hand gets a basis of $75K.

Then it's sold for $225K, with each entitled to half, or $112,500. The father has a gain of $62,500. The son has a gain of $37,500. The combined gain is still $100K, but not split evenly. The father lets the son keep all the proceeds, so the father also has a gift tax return showing $112,500 as the gift.