Investment/Personal Residence Sale

[dusty15]

A married couple have several rental properties and their daughter is getting ready to move into one of their properties. The clients will sell this property in 2 or 3 years.

The clients wonder if there is some way (by titling the property or some other way) they can utilize their daughter’s sale of home exclusion on the future sale without actually selling the property to their daughter currently (which would defeat the purpose since they’d have to pay gains on sale of investment property on a current sale).

[Bees Knees]

Have the clients gift the property to their daughter. File a gift tax return. Daughter then lives there for 2 years and pays all operating expenses and property taxes out of her pocket. When daughter sells the property in two years, she excludes the gain up to $250,000. After the sale is complete, the daughter gifts the sales proceeds back to mom and dad and files a gift tax return.

[JON]

Bees

Agree that probably works, but I believe there is still an IRS doctorine referred to as a "step transaction". When the steps culminate to a final transaction is done to avoid income taxes the IRS can void steps to make the tax fall on/or to the party benefiting from it. 2 years seems good to break up the step, but you sure have some easy tracing with the gift tax returns. Let the daughter keep the money until and if the parents need it..

[Bees Knees]

I don’t know if the step doctrine would necessarily kick in. Maybe, maybe not.

There are other examples in estate planning where this works. The Crummy powers sort of do this. Dad gifts the kids $10,000. The kids have one month to decide if they want to take the cash and go on a spending spree, or contribute it to a Trust that purchases life insurance on Dad. Each year Dad gifts the kids more money below the annual gift exclusion and the kids in turn choose not to spend it but purchase more life insurance through the trust. At Dad’s death, the Life Insurance proceeds in the Trust are not added to Dad’s estate for estate tax purposes.