House deeded to son than sold for huge profit

[Absolut]

I swear if there's been a problem return that I've had them all this year.

Mom & Dad owned 3 unit place, since 11/15/87, they shared it with his brother which I've got to find out how much he had invested in it also b/c they bought him out in 6/30/01.

Part of it was rented and part of it was lived in. The Unadjusted Cost/Basis is a total of $140,417.00, at which they've taken $55,307.00 in depreciation up to the end of 2004. So by taking the Depreciation amount and subtracting it from the Cost/Basis I'd end up with $85,511.00, now can I take the share they have personally invested in it and add it to this to get the FMV at time of deed transfer?

Or where do you suggest I start to figure out what the FMV is? Thank you greatly to anyone that helps me on this one.

[Bees Knees]

I'm not sure why you are asking about FMV? That would only apply if the property were inherited.

[Snaggletooth]

Whoa!!

Whoa there Absolut! Let's start at the beginning - no one but you knows the details.
Try to present the facts chronologically, and use names (even if fictitious) so we'll know whose brother or whose son you're speaking of.

Having these facts obscured, it's hard to know how this will turn out, but if there was a sale shortly after a gift, it would be difficult to make a case for any other FMV value other than the selling price.

Thanks - when we get this straight in our minds, you're going to have a very interesting post.

[Absolut]

House deeded to son

Terry & Liz owned 3 unit home since 1987 in FL. When the purchase was made in 1987, Terry & Liz bought it w/ Terry's brother. I"m trying to find out what the total cost was when they all bought it together.

Terry & Liz lived in it until they move up here to Maine in 2004, and part of the tri-plex was rented out.

On Terry & Liz's tax return for 2004, they had a total of Cost/Basis of $140,417.00 listed on their depreciation schedule, of which they've taken $55,307.00 in depreciation over the years for the rental.

What I'm trying to do is figure what the "Value" of the house is, so that the son who they deeded it to on 4/19/05, and he sold it on the same day for $903,000.00 won't have to have a capital gain of $9003,000.00

I realize the Cost/Basis that was on the depreciation schedule is only 1/3 of the value, I need to get the rest of what they purchased it for and the brothers share also, correct?

I know I said FMV, I guess what I meant was Value on the house for the son (Greg) at the time of purchase. Any suggestion to come up with a cost on the house when Greg sold it? Greg did not purchase it from his mother & father (Terry & Liz), it was just deeded over. When Greg sold it, he paid Terry & Liz's mortgages off, which amounted to $210,910.92.

[Brian EA]

Terry & Liz owned 3 unit home since 1987 in FL. When the purchase was made in 1987, Terry & Liz bought it w/ Terry's brother. I"m trying to find out what the total cost was when they all bought it together.

Terry & Liz lived in it until they move up here to Maine in 2004, and part of the tri-plex was rented out.

On Terry & Liz's tax return for 2004, they had a total of Cost/Basis of $140,417.00 listed on their depreciation schedule, of which they've taken $55,307.00 in depreciation over the years for the rental.

What I'm trying to do is figure what the "Value" of the house is, so that the son who they deeded it to on 4/19/05, and he sold it on the same day for $903,000.00 won't have to have a capital gain of $9003,000.00

I realize the Cost/Basis that was on the depreciation schedule is only 1/3 of the value, I need to get the rest of what they purchased it for and the brothers share also, correct?

I know I said FMV, I guess what I meant was Value on the house for the son (Greg) at the time of purchase. Any suggestion to come up with a cost on the house when Greg sold it? Greg did not purchase it from his mother & father (Terry & Liz), it was just deeded over. When Greg sold it, he paid Terry & Liz's mortgages off, which amounted to $210,910.92.

If the house was rented immediately after purchase, then the cost would be 3 times the amt they used for depreciation

[JON]

Gift

He gets their basis if it was a gift. Guess what if sold the day it was gifted IRS will ignor the sham transfer and have it taxed on the parents return. The parents probably should have it anyway if they lived there 2 out of previous 5 (2004 move per you) they may get some portion of the triplex as exclusion for sale. If the deed transfer did work the gain to the son would be exactly what the gain to the parents would have been. If they owned it how would they not know what they paid for (parents)... Unless they inherited or were gifted portions of it. It still does not work. This gain goes on parents return and if they lived there (2 out 5) they should want it.

[Snaggletooth]

Back to ya...

...Absolut from Maine...thanks for the chronological array, and using names so that pronouns are not confused as to their antecedents.

Firstly, I'm assuming the depreciation schedule listed only 2/3 of the building, since Terry and Liz lived in it long enough to qualify for the residential exclusion. The selling price would be reported as 903,000 to agree with a potential 1099-S. The 301,000 exclusion is added to the basis, so they won't have to pay tax on it. (The "real" selling price is thus only $602,000 but we want to reconcile with the 1099-S assuming one exists).

I would add 140,417 to the basis, and then subtract the 55,307. Thus the basis is now $441,417 and the adjusted basis is 386,110. Gain is then 516,890, and I believe since this is sec 1250 property purchased after 1986, ALL of it is capital gain.

I agree that the transaction was a sham, UNLESS Greg was allowed to keep ALL the money. This is an invitation for trouble, as well as the ramifications for gift tax reporting as the FMV would be ALL of the $903,000 and nearly exhaust Terry and Liz' $1MM exemption. If the gift was not a total, no-strings-attached surrender, then this gets reported on Terry and Liz' taxes, not Greg's.

I haven't mentioned Terry's brother, because you don't know how much he is in the picture. The bigger question, and certainly more complicated, is did his brother share in the rent? Does his brother have "depreciable" depreciation whether he had the benefit or not? And the most prodigious issue of all, can his brother exempt himself from ANYTHING by virtue of it being Terry's residence? (and I think the answer has to be "no.")

Interest post, Absolut.

[Absolut]

House Deeded to son

They let the son keep the money from the sales, except he paid off the mortgages that were on it with his funds. The reason they did it in the first place is so they wouldn't have to pay tax in Maine. Son was a Florida residence.

[Gretel]

Wait a second. If property was located in Maine, Maine taxes need to be paid no matter were the taxpayer lives.

[Absolut]

Not Maine Property

Property was not located in Maine. Terry & Liz lived in Maine whent the sale went through.

[jainen]

Without a doubt

Without a doubt, the son acted only as an agent and the sale must be taxed to the residents of Maine. They even admit that tax avoidance was the primary reason for structuring the sale this way! It's a perfect example of the substance over form doctrine. It simply doesn't count that they quitclaimed to their son in the middle of the transaction.

Their adjusted basis is the original cost plus the 2001 buyout, minus depreciation. Possibly this will be more than the $85K figure--I don't know how they calculated the depreciable basis. Report the sale of the entire property on Form 4797, which will provide the match for the 1099-S. The instructions for that form explain how to subtract the Section 121 exclusion, if applicable. Don't be afraid to use overrides if your software doesn't make the right adjustments.

[erchess]

How long, how long

would the son have had to hold the house before he could sell it with no tax consequences to the parents?

Where can I read an overall explanation of the form vs substance rules? See I didn't notice anywhere in the post that the son gave any of the money to his parents so I would have reported this transaction the way the clients wanted. I guess I would potentially have got myself and them in trouble.

[Snaggletooth]

Form vs Substance

Erchess, good luck on finding anything you can hang your hat on for the eternal "form versus substance" argument. IRS chooses not to commit itself on several interpretation issues, because they benefit the most from cloudy cases.

Unlike civil (or especially criminal) cases, the onus is on the prosecution to portray the violation of specific statutes, and if this can't be done, the prosecution or plaintiff fails. Since the IRS does not have the onus, and even so the taxpayer has to observe almost impossible protocol to even get a court hearing, they can wobble back and forth on their position as they interpret facts and circumstances. Defining positions in their regulations and providing "safe harbor" activities thus create more of a problem for them, even though these things would simplify things greatly for the rest of us.

One of the best examples in recent memory is their attack on independent contractors, where they were going to classify all such cases as employees, NO MATTER WHAT. Their strategy was to pursue this reclassification even if courts ruled otherwise because most taxpayers didn't have the money or wherewithal to pursue a few thousand dollars in court. I'm told this carnage was stopped in 1998 by Congress, probably because the IRS stepped on the wrong toes somewhere.

And yes, I agree with you. If the son did not return the money, then what makes him an agent??

[jainen]

the State of Maine

>>how long would the son have had to hold the house before he could sell it<<

Did you say "hold" it, erchess? Apparently he just drove it down to Honest John's Used Home Lot and cashed out on the quick sale value. Same day -- a new record for million dollar real estate deals!

I know from your screen name that you are well-acquainted with the concept of planning ahead, and you likewise know that a series of steps can in fact comprise a single tactic. A feint down one side doesn't mean that the real action is not on the other side. And even though the notation shows you are merely pushing a pawn, the substance of your move is still the knights' offense.

The IRS knows all these things too, and so does the State of Maine.

[Snaggletooth]

He Kept the Money

Jainen, I've got to agree with the chess machine here. Even if the sale were made on the same day. Was a sale in the works at the time? Of course! Did the parents want the son to have to report the sale? Of course!

There's a big difference however, in the destiny of the proceeds. So long as the son keeps the money, the transfer of the land was a gift. That's a big price for the parents to pay -- give away all the money in exchange for avoiding paying a portion of it. Yes, the IRS would LOVE to have a capital gain reported PLUS a gift tax, but geez, can anyone doubt that this was a real gift of substance and not just a charade?

Not only that, but the son can only report his parent's basis as a cost for income purposes, so there will be income to report anyway (if there ever was). If he gives the money back, he's an agent and the gift is a sham transaction.

But unless I missed something, this did not happen....