Best Advice for this situation????

[gordywest]

My sister is now over the 200K income level. She has a rental property that she is now phased out of completely (for the losses). What would be the best course of action to possibly move this rental to her son? What are the ramifications of this type of move?

Thanks in advance!

[erchess]

I don't understand what it means

to be phased completely out of a rental property. However if she wants to convey the property to her son she has a few options. She could wait until she dies and pass it on through her estate or through some sort of trust designed to avoid the probate process. She could gift it to him, either in annual installments perhaps small enough to avoid gift tax consequences or all at once and accept the reduction in the amount she can pass on tax free at her death to anyone but a spouse. She could sell the property to her son, with or without taking care to charge him its full fair market value. Each of these possibilities has tax consequences and choosing among them would require complete knowledge of her finances. She should consult (in no particular order of preference) an Enrolled Agent, a Certified Public Accountant, or a Tax Attorney in her area.

[gordywest]

Form 8582

Doesn't the $25000 loss limit completely phase out when modified adjusted gross income exceeds $150000?

[Burke]

Doesn't the $25000 loss limit completely phase out when modified adjusted gross income exceeds $150000?

Sort of. They are lost for that taxable year. They actually are not gone, just suspended until such time as the taxpayer's income is below the threshold again, or taken in total when the property is sold.

[joanmcq]

Or taken against income when the rental starts making money.

[JoshinNC]

I thought the estate exclusion and the gift exclusion were decoupled

to be phased completely out of a rental property. However if she wants to convey the property to her son she has a few options. She could wait until she dies and pass it on through her estate or through some sort of trust designed to avoid the probate process. She could gift it to him, either in annual installments perhaps small enough to avoid gift tax consequences or all at once and accept the reduction in the amount she can pass on tax free at her death to anyone but a spouse. She could sell the property to her son, with or without taking care to charge him its full fair market value. Each of these possibilities has tax consequences and choosing among them would require complete knowledge of her finances. She should consult (in no particular order of preference) an Enrolled Agent, a Certified Public Accountant, or a Tax Attorney in her area.

It was my understanding that the $1,000,000 lifetime gift tax exclusion is seperate from the applicable estate tax exclusion for the year of death. Your post makes it sound like lifetime transfers reduce the exclusion available at death. Did I misunderstand you, the code or both?

[gkaiseril]

Disposition to Unrelated Purchaser

My sister is now over the 200K income level. She has a rental property that she is now phased out of completely (for the losses). What would be the best course of action to possibly move this rental to her son? What are the ramifications of this type of move?

Thanks in advance!

As noted your sister needs to seek professional advice. A gift may not allow the loss because of a related party. There could also be baisis issues becuase of the gift.

To take the suspended passive losses there must be a fully taxable disposal to a non-related party, your sisters income will have to drop, your sister would need to turn a profit on this passive income resource.

[LMathey]

In 2004 they decoupled the gift tax and estate taxes. The gift tax credit amount is frozen at $345,800 which will shelter $1,000,000 of gifts. The estate tax credit in 2008 will shelter $2 million this year. However at a person's death the amount of credit used against gifts is applied against the amount of estate tax credit. In other words if you gift it now, it will reduce the credit available at your death.

This does not apply to the $12,000 annual gifts which can be made to any person.