Gifted and then sold rental house

[BHoffman]

I have a gifted rental property as of 07/01/15.  Donor's basis was $136k.

The donor will file form 709, but won't owe any tax due to the applicable credit amount.  The donor died in February, 2016.  The donor and donee were a long-time unmarried couple.

The donee did not rent the property to anyone.  He paid $8k for improvements.

The donee sold the property on 12/11/15 for $130k

I'm thinking the donee's basis is $138k:  The lower FMV of $130k on the date he received the gift plus the $8k he paid for improvements.  

So, he has a short term capital loss of $8k.  Is that right?

Thanks!

 

[Lynn EA USTCP in Louisiana]

Did the donee live in the house?

[jklcpa]

Was the donor's basis of $136K after depreciation deductions allowed or allowable?

If you are using the FMV because it is lower, then the holding period begins on the date of the gift, so you are correct that the loss would be short term.

If the cost less depreciation allowed or allowable is less than FMV, then that would be the value of the gift, the holding period would include the donor's holding period, and you would be splitting the transaction into ordinary income and cap gain income or loss if there is depreciation recapture.

[BHoffman]

No - The donee never lived in the house.  

Yes - The donor's (adjusted) basis of $136K was after depreciation.

How do I get the property off the donor's tax return?  Do I fill out a 4797 with the sale price equal to the adjusted basis so there is no gain or loss?

Also, I just report the sale on the donee's form 8949 and there are no problems with the 1099S form, right?

Thanks so much.  This is basic stuff but I'm still so stressed out about Toody and the in laws' dog that I don't trust my own judgment.  Next week my BIL and SIL are visiting for a few days, but they are a lot less high maintenance than the parents and their dog!

Hubby owes me big time for having his relatives visit during the tax season, but he was a hero about Toody.

 

 

[Lynn EA USTCP in Louisiana]

For the donor, In ATX there are choices of disposition methods, one of which might pertain to the donor - either converted to personal , or do not calculate gain or loss - to remove this property from the donor's depreciation schedule . 

[BHoffman]

In Drake, there is no such luck

[Lynn EA USTCP in Louisiana]

Then, I would make the sale price equal to the adjusted basis so that no loss or gain is reflected on the return. Will that work in your client's situation? 

[BHoffman]

I think I'm a nimrod.  Why do anything?  I can just leave it there.  

I'm a mess today!

 

[Lion EA]

Except that it's snowing here!

[BHoffman]

I wish you were here

[Lion EA]

Me, too!

[Catherine]

15 hours ago, lynn EA in Louisiana said:

Then, I would make the sale price equal to the adjusted basis so that no loss or gain is reflected on the return. Will that work in your client's situation? 

That is exactly how to handle this in Drake.  Had a similar situation last year.  No loss, no gain, for the 4797.  Handle depreciation recapture for rental on sale of home screen.

[BHoffman]

Catherine - can you help me out regarding the depreciation recapture?   Is there really any of that to the donor or am I misunderstanding? 

I know there isn't any depreciation recapture for the donee because he never rented it out.

 

 

[BHoffman]

Oh, forgot something important:  The FMV was used as it was lower than the adjusted basis.

I was under the impression that if FMV is used to determine the basis of the gifted property, the donee would not have depreciation recapture upon the sale.  Is that correct?

The donee never rented the property and held it as investment only.

[Catherine]

14 minutes ago, BHoffman said:

Catherine - can you help me out regarding the depreciation recapture?   Is there really any of that to the donor or am I misunderstanding? 

I know there isn't any depreciation recapture for the donee because he never rented it out.

 

 

The whole basis issue is more complicated than "the donee never rented it."  IF the donee got the gift before the donor died, then donee's basis is donor's basis plus money donee put in to property.  Donor's basis is adjusted by accumulated depreciation over the years of rental.

If donee got the property upon donor's death, then donee gets basis step-up as of DOD FMV, plus money put in to property.

I can't answer any of those issues for you as the devil is in the details and you have more of those than I do.  All I wanted to confirm was how to get rid of the property on the depreciation schedule, in Drake, while not making a further muck of things.

[jklcpa]

The property was sold at a loss no matter which value you use, so the basis for computing the donee's loss is the lower of donor's adjusted basis or FMV at the date of the gift, and in this case that would be the FMV of $130K.  From there, the donee has additional basis of $8K of additional improvements.

BHoffman, check out pub 544, use ctrl-F for "gift" and that will take you to the sections on handling sales of gifted property.

Maybe this paragraph from the MTG at para 1788 will help:

• Gift of Code Sec 1245 or 1250 Property:
• The recapture of depreciation as ordinary income when a sec 1245 or sec 1250 property is sold or otherwise disposed does not apply in the case of disposition by gift or to transfers at death (except a taxable transfer of sec 1245 or sec 1250 property in satisfaction of a specific bequest of money) (Code sec 1245(b )  and 1250 (d ); Reg. sec 1.1245-4).  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 sec 1245 or sec 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.

However taking this one step further, because the property was sold for less than the net book value of the donor, I don't believe there would be any recapture of depreciation because if the donor sold it for that, the donor wouldn't have recapture. I don't have time to research that, but I think the entire loss is a short-term capital loss.

[BHoffman]

Thank you so very much!

I prepared the donor's tax return as though she sold the property and it was never gifted.  After improvements and selling expenses, the transaction results in a loss of ($32,765).

The donee's loss using FMV plus improvements and selling expenses is ($19,227).

 

 

[jklcpa]

You're welcome.