Installment Gift?

[Snaggletooth]

I've asked this before (or alluded to it), but not sure there was an answer that made sense. Maybe the question doesn't make sense either.

Momma has property worth a cool $1,000,000. She sells it to her son for $700,000, but on an installment basis over 10 years. Her basis is $300,000 so she reports a $400,000 capital gain, also on the installment basis, and claims annual interest.

In the year of sale, she reports gift of $300,000 or $276,000 after the $24000 exclusion for the son and his wife. The $276,000 comes off her unified gift exclusion, thus no tax is paid upon filing the return.

After four years, the son defaults and still owes $490,000. The property reverts back to Momma upon default.

How should Momma approach the gift of $276,000 which was never effectively "given?"

[Snaggletooth]

Stirring Response

Thanks, guys, for that overwhelming chorus of posts to my thread. I wouldn't bring it up again except I am going to be confronted with (at least part of) this situation before December is through.

Jainen, I am in such need of an answer, I'll even listen to YOU.

[WhiteOleander]

Well, I didn't respomd because I don't do alot of gift tax stuff.

The first thought I had was there should never have been a gift tax return filed because at the beginning there was not a completed gift. This was to be a future gift when all payments had been made.

Can an amended gift tax return be filed and remove the gift given?

[BOB W]

Installment sale.....

..... My understanding is > you cannot have an installment sale between related parties. That is, you can have time payments but you cannot defer reporting all Issues in the year of sale.

[Snaggletooth]

Related Parties

Bob, I hope you're wrong -- but you're not wrong very often. I believe there is a related party question on Form 6252, but I'm not sure it prevents selling on an installment basis. Time to look in the Tax Book or read the instructions.

[BOB W]

Installment sale.....

...Looks like you may have a situation where you can go ahead. But if it is depreciable property you will have a problem.

Here is 6252 read page 2 under related parties.

http://www.irs.gov/pub/irs-pdf/f6252.pdf

After post>>>>>> Your total question is beyond my "off the head" response. As there is now a default on debt and gift. I had only read the issue of Related Party and Installment Sale. Sorry.

[jainen]

he gifted it back

Honest, I didn't see this post last night. I signed off early so I could watch that new Johnny Depp movie. ( By "new" I mean just released on DVD.)

Well, about the related party issue--that only applies to depreciable property. You didn't mention it so hopefully we don't have to deal with that.

The purchase contract was only for a 70% interest, so that's all he defaulted on. He still owns the 30% that was gifted, unless he gifted it back.

[BOB W]

So..........

... Even though he defaulted on the installment sale he is now a joint owner in the property with his mother. If the mother wants all the property back the son would have to gift it back or the mother would have to BUY it back from the "Deadbeat" son.

[Snaggletooth]

No Joint Ownership

There could be various possibilities for purposes of discussion, but the particular case confronting me stipulates that if the receivable goes into default, the title to the property is entirely repossessed by Mother.

[jainen]

love that loophole

Can you amend a gift tax return so that it doesn't count against the lifetime exclusion?

It seems that it was a conditional gift. If it weren't family members you might argue (if the son were your client) that this is an example of how recorded title does not accurately memorialize the true title, and the gift is binding on the donor. But he gave it back, so it does look like he never had the gift portion to begin with.

I forget the original question. Oh yes, what does Mom do? Corrected Form 706 is all I can think of. It isn't reasonable to allow a basis adjustment--everybody with an estate less than the lifetime exclusion would love that loophole!

[BOB W]

Question?

What about the money that was paid on the note? Is this a basis adjustment or a reportable gain?

Reposession rules........ ?

[jainen]

it was in fact wrong

>>in the case of the property where the state estate tax return had a value of $450k and the true appraised value was $900k then amending that return is out of the question?<<

My position on the other matter is that the return should be amended if it is wrong and we can't use a different figure unless it is amended. However, we do not know from the limited information given that it was in fact wrong.