Gift - What basis was used

[ILLMAS]

I have never prepared a gift tax return, but I wanted to know what basis is used to determine the value of the gift (something the IRS would accept as reasonable), mind sharing an example.

 

Thanks

[jklcpa]

What is being gifted?

[Jack from Ohio]

The lower of FMV or actual basis of the giver.

[jklcpa]

I have never prepared a gift tax return, but I wanted to know what basis is used to determine the value of the gift (something the IRS would accept as reasonable), mind sharing an example.

 

Thanks

 

Are you asking about the method to determine the FMV of the gift to be listed on the gift tax return filed by the donor, or the basis of the gift in the hands of the recipient?

 

What exactly is being gifted? 

[ILLMAS]

This is the type of example I am looking for, a parent gifts a property or a business to one of his kids, in short what steps were taken to make sure if the IRS comes knocking, both your client and kid covered their butts (reasonable transaction).  I have heard stories of parents giving their kids a $100K property for $1.

[Jack from Ohio]

This is the type of example I am looking for, a parent gifts a property or a business to one of his kids, in short what steps were taken to make sure if the IRS comes knocking, both your client and kid covered their butts (reasonable transaction).  I have heard stories of parents giving their kids a $100K property for $1.

 

The lower of FMV or actual basis of the giver.

Same answer.  Sale price is irrelevant for the gift tax return.  Selling for $1 gives the recipient a basis of $1.  If simply gifted, the recipient's basis is the same as the donor. 

 

Selling for $1 is a stupid urban myth attempt to avoid taxes. 

[jklcpa]

This is the type of example I am looking for, a parent gifts a property or a business to one of his kids, in short what steps were taken to make sure if the IRS comes knocking, both your client and kid covered their butts (reasonable transaction).  I have heard stories of parents giving their kids a $100K property for $1.

 

Jack is answering about the recipients basis where the recipient acquires the donor's basis (steps into the shoes of the donor).

 

If you are actually asking about how to prepare the gift tax return and about determining the fair market value at the date of the gift to report on Form 709, Sch A, column F, that is a much more complicated answer about how to determine the value of an ownership interest in a closely held business on a piece of property. If that is really what you are asking about - 

 

If by property you mean real estate, I'd suggest your client use a qualified professional to appraise it because the documentation of how the FMV was determined is required to be attached to the gift tax return, and gift tax returns are reviewed by humans at the IRS.  That is a risk area for tax preparers since doing valuations aren't within the normal scope of a tax preparation business.   A typical scenario that I've encountered a few times goes something like this: A parent owns his own residence and a 2nd house that the child is living in (for little or no rent) and transfers that 2nd home to the child by gift. Yes, the child's basis comes from the donor's basis, but in preparing the gift tax return, the preparer must explain the method used and report the FMV on the date of the gift because that determines how much of the unified credit is used up by that gift and calculates whether there is a taxable component to the gift at all. 

 

Business valuations are much more complicated and especially so when the business is closely held. There are business appraisers that do that too. There are methods that the IRS finds acceptable and that take into consideration a variety of factors that I feel are really beyond the scope of something that could be easily or completely explained here. Again, an explanation of the valuation method used must be filed with the gift tax return. If you are considering doing this, you might want to check with your malpractice insurance agent to make sure that type of service is covered.

 

As an example, I had a C corp client that gifted 76% of his ownership in his closely held business to his son in stages over several years.  To highlight a few of the areas considered in that valuation, those factors included the type of industry, the size of the business by volume or asset base, its locale, its competition, stability of client base, discounts for lack of marketability due to being closely held, adjusting for owner compensation that might be in excess of what the business would pay an outsider or manager to perform those same duties, and much more. That list of factors isn't meant to be a full discussion, obviously, so don't shoot the messenger. I was only trying to show how business valuations are complex.   A full explanation of how those valuations were done was attached to each and every gift tax return that was filed. No funds changed hands, the son received something that had appreciated close to 50 times more than the dad's basis in the company, and son's basis in the company is equal to 76% of dad's basis. 

 

The gift tax return filed by an individual tracks the total gifts given by that person over his or her lifetime so that one knows how much of the unified credit has already been used up while he/she was living, and that is used in determining if there is a taxable estate or not at the person's death.  To be basic, the current law says that a person can transfer $5.34 million of assets either by gift during his lifetime or at his death via his estate without paying tax. That is what the unified estate and gift tax exclusion is all about.

 

Does that help you at all?

[BulldogTom]

This is the type of example I am looking for, a parent gifts a property or a business to one of his kids, in short what steps were taken to make sure if the IRS comes knocking, both your client and kid covered their butts (reasonable transaction).  I have heard stories of parents giving their kids a $100K property for $1.

In short, a professional arms length valuation by a recognized professional.  Most tax preparers cannot do this.

 

Tom

Hollister (soon to be Newark), CA

[jklcpa]

In short, a professional arms length valuation by a recognized professional.  Most tax preparers cannot do this.

 

Tom

Hollister (soon to be Newark), CA

 

 

  Hey, I was on a roll.  Tom summarized it nicely in 2 sentences.

[ILLMAS]

In short, a professional arms length valuation by a recognized professional.  Most tax preparers cannot do this.

 

Tom

Hollister (soon to be Newark), CA

 

Perfect this was exactly what I was looking for, an FYI for the rest, I am not going to prepare a gift return, stay calmed  

[BulldogTom]

No reason not to perform the tax preparation on the gift return.  Just don't get into the valuation part of it.  The Gift Tax return is fairly simple and straight forward if it is a full interest in a gift.  As long as you have a competent valuation advisor, it is not a tough return.

 

Just heed the warning about not getting into valuations.

 

Tom

Hollister (soon to be Newark), CA

[ILLMAS]

Thanks Tom, gift tax return was prepared back in 2012 for 2011, we are crossing our finger that the TP had a valuation done back then in case it ever comes up.

 

MAS