Basis for this lot - you can't make this stuff up

[RitaB]

Ann paid $5,000 for a lot.

Ann engaged Realtor and listed lot for sale for $10,000.

Bob expressed interest in the lot.  Since Bob is a dear friend of Ann's, Ann wanted to give Bob the lot.  But Ann is, yes, in fact, an angel, and she also wanted the Realtor to make $3,000.

So Ann gave Bob $10,000.  (Ten thousand dollars.)  Bob purchased the lot with the $10,000; and Realtor got $3,000 commission.  Ann received $7,000.  

Ann then gave Bob the $7,000. (Seven thousand dollars.)

So, of course, now Bob sells this lot, and if you thought that explanation was tedious, you should have heard Bob tell this (not her real name, and she's a hairdresser). 

Is Bob's basis $3,000?  Because I think Bob's basis is $3,000.

[BulldogTom]

26 minutes ago, RitaB said:

So Ann gave Bob $10,000.  (Ten thousand dollars.) 

Bob purchased the lot with the $10,000 

Ann then gave Bob the $7,000

Is Bob's basis $3,000?  Because I think Bob's basis is $3,000.

@RitaBWow.   I want an angel like that in my life.   Can you introduce me to Ann and does she have any more lots?

But to your question.....

OK, you could say that Bob received 2 gifts from Ann ( 10K first, then 7K later).   He used the 10K gift to purchase the property.   Basis is 10K.

Or, under the substance over form doctrine, Bob was gifted the property, in which case Bob gets the basis of the person making the gift.  Basis is 5K.

I don't get to 3K basis, how did you come to that conclusion?  Not criticizing, just wondering what your thought process is to get to that number?   Did I miss something?

Tom
Longview, TX

[mcb39]

Personally, I think Bob's basis is zero and Ann should be claiming a $2000 gain. 

[kathyc2]

Basis could be 0, 3K, 5K or 10K depending on how you look at it.

 

[RitaB]

38 minutes ago, BulldogTom said:

@RitaBWow.   I want an angel like that in my life.   Can you introduce me to Ann and does she have any more lots?

But to your question.....

OK, you could say that Bob received 2 gifts from Ann ( 10K first, then 7K later).   He used the 10K gift to purchase the property.   Basis is 10K.

Or, under the substance over form doctrine, Bob was gifted the property, in which case Bob gets the basis of the person making the gift.  Basis is 5K.

I don't get to 3K basis, how did you come to that conclusion?  Not criticizing, just wondering what your thought process is to get to that number?   Did I miss something?

Tom
Longview, TX

Yes, I originally thought Bob's basis was $10,000 as well, but then I started thinking the second gift should be subtracted.  10,000 - 7,000 = 3,000.

[RitaB]

8 minutes ago, kathyc2 said:

Basis could be 0, 3K, 5K or 10K depending on how you look at it.

 

Well, I never got to Zero, and I thought I had looked at it all the ways.  

 

[kathyc2]

8 minutes ago, RitaB said:

Well, I never got to Zero, and I thought I had looked at it all the ways.  

 

Zero because she gave him the money to buy it, then gave him an additional 7K to boot!  

[Lion EA]

Were any of the transactions contingent on any other transactions? Actual contract or implied contract? When Ann gave Bob $10,000, could he have moved to the Bahamas and never bought the lot? In other words, was it a gift with no strings attached? Then, you go through each step with your questions.

One scenario has Ann filing a gift tax return for $17,000 and a $5,000 gain (less costs) on her 1040 plus Bob with a $10,000 basis. But, I can see all the other scenarios, also.

Intent.

[RitaB]

1 hour ago, Lion EA said:

Were any of the transactions contingent on any other transactions? Actual contract or implied contract? When Ann gave Bob $10,000, could he have moved to the Bahamas and never bought the lot? In other words, was it a gift with no strings attached? Then, you go through each step with your questions.

One scenario has Ann filing a gift tax return for $17,000 and a $5,000 gain (less costs) on her 1040 plus Bob with a $10,000 basis. But, I can see all the other scenarios, also.

Intent.

There were strings.  It was understood that Bob was "buying" the lot, so realtor could get HER commission.  Bob is also an angel, and she would never abscond with the dough.   She would mess up my highlights, but never abscond with the dough.

[Lee B]

Wow, so the realtor gets a 30 % commission?  

[RitaB]

47 minutes ago, cbslee said:

Wow, so the realtor gets a 30 % commission?  

Yeah, I don't know what planet these people are living on, correct.  

[TexTaxToo]

Does the 30% commission count as a gift, too? 

From the Supreme Court ruling on gifts in  Commissioner v. Duberstein:

Quote

Moreover, the Bogardus case itself makes it plain that the donor's characterization of his action is not determinative—that there must be an objective inquiry as to whether what is called a gift amounts to it in reality. ... It scarcely needs adding that the parties' expectations or hopes as to the tax treatment of their conduct in themselves have nothing to do with the matter.

 

[Sara EA]

Using the Supreme Court's ruling, Ann gifted Bob the lot and the realtor the commission.  That won't work on the tax return though because there are tax forms that need to match the returns.  Ann has a 1099S for $10k and a basis of $5k + $3k selling expense = $2k gain.  Realtor has a 1099 for $3k income.  Bob bought for $10k (matching the 1099S) so that's his basis.  Or in harmony with the SC, his basis is hers, $5k.  Ann must file a gift tax return for the $17k she gave Bob.

[RitaB]

Well, Bob brought in the settlement statement prepared when Bob obtained ownership of the lot on 9/08/2020.  Don't you know, the settlement statement looked nothing like the story.  Sales price 7,000 and Realtor commission was 2,000.  Other settlement fees were $500. 

Bob did put a note in her stuff saying, "Received lot from Ann 9/08/2020."  That's the gist of this whole thing.  I'm going with Bob's basis is Ann's basis.  $5,000. 

That was my first thought, but Bob kept talking, and I kept thinking.  How Ann reported this is not my concern.  She may have reported 17,000 on Sch A donations for all I know.  Thank you, all, for your input.

Stay strong!  It's about time for the three clients you hoped went elsewhere to show up with half their stuff.  Hugs!

[Lee B]

Thanks Rita, your story made me laugh several times and now I have a big smile on my face

[Abby Normal]

Ann gave up her lot + $3,000 cash. Bob ended up with just the lot and assumes Ann's basis of $5,000 because he gave up nothing, so the lot was essentially a gift, despite the semi-elaborate transactions.

[Lion EA]

And, the realtor better report her earned income!

[Catherine]

And if Ann shows up wanting to become a client, you tell her you're not taking new clients at this time. Then lock the door when she leaves!

[RitaB]

16 hours ago, Catherine said:

And if Ann shows up wanting to become a client, you tell her you're not taking new clients at this time. Then lock the door when she leaves!

Absolutely!  Ann probably thinks MY ministry is to do discount work for angels.  Hard pass.