Basis of Property Acquired By Gift

[djack1040]

Generally speaking, the basis for a donee is the same as it would be in the hands of the donor.

Can a individual "make a gift to his adult child" of rental property whose depreciated basis is substantially below FMV?

For discussion, original cost $25k; NBV $5k; FMV $75k.

What is impact on donor's Sch E or Form 4797; and donee's new basis as the property will continue to be rental property.

Unless there is some restriction on business property transfers, looks to me like no gain or loss to donor upon transfer and basis for donee will be $5,000 (same as basis in the hands of donor).

What if gift is made to an unrelated party (no complicating issues-just a benevolent act) <Don't laugh-it happens>

[Bees Knees]

There really is no tax avoidance when transferring business property by gift to a related person, because the basis in the property remains unchanged. The gift to the adult child simply means the adult child will continue to depreciate the property using the same depreciation schedule that the father was using. If the adult child turns around and sells the property, gain will be based on what it would have been to the father had the father sold the property.

However, you can’t transfer a loss by gift. If the donor’s adjusted basis was more than FMV at the time of the gift, then the donee’s basis would be limited to FMV.

The same rules apply regardless of whether the person is a related person or not.

[OldJack]

I agree with Bees Knees and would also point out that the difference in the FMV and basis is the gift required to be reported on a gift tax return. In your case the gift is the FMV less the sale price, which was zero, therefore the gift was $75,000. The father has a non-deductible loss of $5,000 (adjusted basis less zero sale price equals $5,000 loss). This is from substituting your amounts into the following example in pub 544:

Example. You transferred depreciable per
sonal property to your son for $20,000. When
transferred, the property had an adjusted basis
to you of $10,000 and a fair market value of
$40,000. You took depreciation of $30,000. You
are considered to have made a gift of $20,000,
the difference between the $40,000 fair market
value and the $20,000 sale price to your son.
You have a taxable gain on the transfer of
$10,000 ($20,000 sale price minus $10,000 ad-
justed basis) that must be reported as ordinary
income from depreciation. You report $10,000 of
your $30,000 depreciation as ordinary income on
the transfer of the property, so the remaining
$20,000 depreciation is carried over to your son for
him to take into account on any later disposi-
tion of the property.

[djack1040]

Gift Tax

Thanks guys for you input.

I completely overlooked the gift tax (return) ramifications.