Rental Property

[S T]

Parent and Son own a rental property. Parent wants to gift his portion to Son,

1. so the basis would be the Parent's cost, plus improvements, less depreciation? Let's say cost $100,000 plus $50,000 improvements less $35,000 depreciation = $115,000???

1A. Son's basis is $100,000 plus $50,000 improvements less $35,000 depreciation = $115,000.

So if the above 1 and 1A are correct, the son's basis in the property $115,000 from the parent gift, plus $150,000 on his own portion and $35,000 depreciation subject to recapture?

2. if after the gift is completed, the son moves into the property and occupies as his personal residence for the 2 out of 5 year period, how is the Sect 121 exclusion applied?
To the $115,000 gift plus $150,000 son's portion = $265,000 and then the $35,000 is subject to recapture??

Sandy

[jainen]

No

No. Section 121 exclusion can not be used for gain attributable to the depreciation. That's up to $70,000 in your example, not $35,000. Technically it's not "recaptured." It is taxed as capital gain with a maximum rate of 25%.

[Gretel]

Are you sure that son will have to deal with deprecition taken by parent? It's reflected in the lower basis already. Isn't that all I care about in regards to gifts, besides a gift tax return?

[jainen]

Yes, I'm sure

>>It's reflected in the lower basis already<<

Yes, I'm sure. The depreciation on the son's own half is also "already reflected in the lower basis," right? That makes the gain on sale higher, and that higher gain is due to depreciation allowed. The recipient not only takes on the donor's basis, but other elements like suspended losses and unrecaptured 1250 gain.

[Jan]

rental

The recipient not only takes on the donor's basis, but other elements like suspended losses and unrecaptured 1250 gain.

I don’t understand how or where does the recipient adjust for suspended losses. In the above example. The recipient base would be $115,000.00 from the gift property. If the donor had suspended loss (say $20,000) where would you show that? Or would the base be $95,000 to the recipient.

Jan

[jimmcg]

Suspended Losses

Suspended losses are generally utilized in the future either against passive income or ultimately upon the sale of the property that generated the suspended loss.

[Jan]

Suspended loss

Any passive activity losses that have not been allowed generally are allowed in full in the tax year you dispose of your entire interest in the passive activity. However,, for the losses to be allowed, you must dispose of your entire interest in the activity in a transaction in which all realized gain or loss is recognized.
Also, the person acquiring the interest from you must not be related to you.

[S T]

Gifting Rental Property &amp; Passive Loss

So in the above example,

Dad can gift his interest to Son, Son's basis in gift is $150,000 and track the $35,000 depreciation for future gain treatment (not allowed under Sect 121). To these figures add the son's basis and calculate his depreciation allowed over the years (not allowed under Sect 121).

Dad who is gifting his interest had no passive loss carryovers, however, Son has passive loss carryovers and will probably incur some additional passive loss carryover in the next few years.

If son converts the rental to a personal residence and meets the Sect 121 exclusions, then will the passive loss carryovers be released and used when the sale takes place to offset some of the amount of depreciation subject to gain treatment?

Does anyone see any potential pitfalls with the Father gifting his interest in the Rental property, the son possibly at a later date (in 3 years or so) converting to his personal residence, then subsequently selling the property to meet the Sect 121 exclusions?

Sandy