Farm gifted to children. Depreciated assets.

[Jack from Ohio]

82 year old client gifted her farm to her 3 children in 2014. $1.3M value.  Her attempt to keep the wealth out of the hand of Medicaid if she goes into a home.  For the record, she did not call me before the attorney did it for her.

 

Gift tax return filed appropriately. 

 

How should I treat disposition of depreciated assets?  They went with the farm to the children. 

 

Sale on 4797 for $0?  I am just brainstorming here.  Never crossed this bridge before.

Edited April 12, 2015 by Jack from Ohio

[Lion EA]

Converted to personal use (and then gifted personally)?

[Gail in Virginia]

Apparently, the depreciable assets were part of the gift and should have been included in the 1.3 million value at their current adjusted basis  (I think.)  Which would make their basis in the hands of the donees the same as the basis was in the hands of the donor, and no gain or loss would be recognized on the transfer.  But no guarantee is given with the answer - it is APRIL the 12TH!

[Terry D EA]

<<<<They went with the farm to the children.>>>> Gail is right and I think she is also right on the adjusted basis. This would be handled the same way as the property basis. The children's basis is their mother's basis so agree no gain or loss recognized. 

[DANRVAN]

The only issue I can see would be if section 179 was taken and gift was made before the end of depreciable life; recapture.

[jklcpa]

Gail is correct that the basis in the hands of the donee will usually be the adjusted basis from the donor, but if the FMV of the gifted assets is less than its adjusted basis, then the basis in the hands of the donee is the FMV.

 

If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income.

 

Para 1788 from Master Tax Guide here, and it has the refs to the code and regs-

1788. Gift of Code Sec. 1245 or 1250 Property. The recapture of depreciation as ordinary income when a section 1245 or section 1250 property is sold or otherwise disposed (,-r 1779) does not apply in the case of disposition  by gift or to transfers at death (except a taxable transfer of section 1245 or section 1250 property in satisfaction of a specific bequest of money) (Code Sees. 1245(b) and 1250(d); Reg.§ 1.1245-4).182 Upon a later sale, however, the donee will realize the same amount of ordinary income that the donor would have realized if the donor had retained the property and sold it (except in the case of a tax-exempt donee). Also, if the taxpayer contributes section 1245 or section 1250 property to a charitable organization, the allowable charitable contribution deduc­tion is reduced by the amount that would have been treated as ordinary income if the taxpayer had sold the asset at its fair market value (,-r 1062).

Danrvan is also correct that if about the recapture. If a person gifts listed property or property that sec 179 has been taken on, part of those provisions requires that the person always uses that property greater than 50% business use, so the gift triggers recapture of accelerated and bonus depreciation and sec 179 because the gift causes business use to drop to 0%.  Hopefully you don't have this complication!

Edited April 30, 2015 by jklcpa
removed pdf and added text from 1788 directly to post