Interest deduction and More

[S T]

Father/Mother AND Son/Wife jointly own a rental property. On Deed and on Loan!

Father/Mother decide that they no longer want to be part of this property, so are wanting to gift their interest to Son/Wife. So is their basis their share of the purchase and improvements less accumulated depreciation?

Since they gift their share, then a Gift Tax Return will more than likely have to be prepared in the year the gift is made, correct? If so, that would be 2007.

In the meantime, Son/Wife refinanced the rental property 7/06, and don't ask me how they managed it, but they refinanced only in their names without the Father/Mother, however the Father/Mother as of 12/31/06 were still on the Deed, just not on the new refinanced loan.

A quit claim deed is being prepared now in 2007 to remove the Father/Mother.

So next question, for 2006, don't I have to report all of the rental income and expenses for 50% to the Father/Mother, except since the Father/Mother were relieved of liability debt in 7/06 they are only entitled to mortgage interest deduction through 6/30.

Then one more question, Son/Wife when they acquired the refinanced debt, borrowed an additional $100K which they then loaned to the brother who was going through a divorce. Is the additional mortgage interest on the $100K deductible for the Son/Wife on the Schedule E rental property??? If I have to use tracing rules, I would say no!

I have even confused myself on this one, so any help would be appreciated.

Sandy

[JG EA]

Father/Mother AND Son/Wife jointly own a rental property. On Deed and on Loan!

Father/Mother decide that they no longer want to be part of this property, so are wanting to gift their interest to Son/Wife. So is their basis their share of the purchase and improvements less accumulated depreciation?

Sandy, I don't know a lot about gift taxes, but it's FMV, not basis, isn't it?

Since they gift their share, then a Gift Tax Return will more than likely have to be prepared in the year the gift is made, correct?If so, that would be 2007.

Correct and yes.

In the meantime, Son/Wife refinanced the rental property 7/06, and don't ask me how they managed it, but they refinanced only in their names without the Father/Mother, however the Father/Mother as of 12/31/06 were still on the Deed, just not on the new refinanced loan.

A quit claim deed is being prepared now in 2007 to remove the Father/Mother.

So next question, for 2006, don't I have to report all of the rental income and expenses for 50% to the Father/Mother, except since the Father/Mother were relieved of liability debt in 7/06 they are only entitled to mortgage interest deduction through 6/30.

Have to? If someone is including all, I'm not so sure you have to. To whom did the rental receipts go,? If if was all the kids wouldn't it be alright for them to claim the whole rental? I'm on shaky ground here.

Then one more question, Son/Wife when they acquired the refinanced debt, borrowed an additional $100K which they then loaned to the brother who was going through a divorce. Is the additional mortgage interest on the $100K deductible for the Son/Wife on the Schedule E rental property???

This I am sure about, definitely not.

[S T]

More

JG

Thanks so much for your thoughts, Mine are so confused right now by what the clients did in 2006.

Basis, (I believe) for gifts is the donor's basis, not FMV. FMV is for estates and inheritances (deceased). Please someone correct me if I am wrong.

However there is that rule on gifts, that if "If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or loss when you dispose of the property" or " Your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held the property" Or "If the FMV is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid" Very confusing! With property values up in the Western US, I would suspect that it would be the latter, and use the donor's adjusted basis.

On my t/p problem, both parties Father/Mother and Son/Wife collected rents for the entire year. so income should be 50/50 and deductions 50/50 for the entire year. All parties on the deed, but not on the loan for all of 2006. Question is on the mortgage interest, due to the refinance in 7/06 and the Father/Mother are not on the new refinanced loan, but still on the deed to the property for ownership.

So what can Father/Mother claim in mortgage interest in 2006??? What can Son/daughter claim on Mortgage Interest in 2006. And is the $100,000 equity taken out eligible for the mortgage interest deduction for schedule E or anywhere else on the tax returns?

Sandy

[S T]

Can anyone shed some light

I am confused!

Can someone help sort this one out.

Thanks

Sandy

[Kram BergGold]

Gifts are FMV

When preparing a gift tax return the value of the gift is FMV. Think about it. The gift tax is tied to the estate tax and when you die basis is FMV. A is getting ready to die. He owns a building that has been depreciated to zero plus land value. If gift value was not FMV he could give it away and get it out of his estate very cheaply.

[S T]

Basis for Gift of Real Estate

Parent gifting 50% interest in rental property to Son.

For Son on rental depreciation schedule I would use the parents cost less accumulated depreciation and we will assume no gift tax?

"From TB21-33 the basis of property received as a gift is the donor's adjusted basis at the time of the gift. "

Is this correct? I know there are the other rules for calculating gain/loss. Have to figure out how to track that for a future date.

Sandy

I will prepare the form 709 Gift Return as well for the transaction.

[Gretel]

Sandy

I think the confusion is that basis means different things for gift tax returns and for the receiver of the gift. Yes, for the receiver it's the donor's basis, for gift tax purposes it's FMV.

In regards to your question about mortgage interest: If parents still made their part of the mortgage payments one could argue, since they are not on mortgage any longer, they can not take it.

On the other hand they still were the legal owners and maybe the same rule applies as it does for people who have someone else take out the mortgage (because they won't get one in their name) but are the legal owners of the property and pay the mortgage.

Good luck.

[S T]

Thanks

Thanks Gabriele,

It was most definitely the confusion between the basis for gift tax returns and what the actual depreciation basis was for the form 1040.

I am thinking the parents can't take the mortgage interest deduction after the refinance date , particularly in view of the fact that they are gifting the property to the son, now.

Seems like T/P just got the cart before the horse on this transaction.

Sandy