STCG or LTCG on gifted property valued at FMV

[BHoffman]

I have a gifted rental property as of 07/01/15. Basis was $136k. The donor will file form 709, but won't owe any tax due to the applicable credit amount.

The donor died in February, 2016. The donor and donee were a long-time unmarried couple.

The donee did not rent the property to anyone. He paid $8k for improvements.

The donee sold the property on 12/11/15 for $130k

I'm thinking the donee's basis is $138k: The lower FMV of $130k on the date he received the gift plus what he paid for improvements.

So, he has a short term capital loss of $8k. Is that right?

If the property's FMV was $130k when it was given to him, then you are correct.

Probably not. Date "basis" includes the time the gifted property was owned by the donor, so your client probably has a LT loss, not a ST one. But it may be an ordinary loss, not a capital loss. You said it was rental property, but then said it wasn't rented. So what was it? Rental property? Investment property? The house he lived in? Makes a difference.

Hi Roland - I think the property in the hands of the donee would be investment property since it was never rented or available for rent after the gift date. I understood that if FMV is used, then the holding period is that of the donee and not the donor. That's why the STCG. Am I on the right track with that?

Thanks very much for your advice

[Roland Slugg]

So, he has a short term capital loss of $8k. Is that right? I understood that if FMV is used, then the holding period is that of the donee and not the donor. That's why the STCG. Am I on the right track with that?

Yes, you are! I didn't know that until I just looked it up. Good catch. This is covered in Code §1223(2) and Regs §1.1223-1.

[BHoffman]

Thanks much for the assurance I read the destructions but still feel like I'm tiptoeing through a mine field sometimes.