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Let's say a married couple has a land lot worth about $100K, they decide to sell it to one of their children instead of gifting it, they sell it for $20K so they can build their personal home in the future.  If the children wanted to pay the tax on $80K (to be at par with the FMV), where would they report it?   Sch D?

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I don't think it works that way.  So you want a step up in basis without the parents reporting the gain?  If the child paid the $20,000 plus the tax on $80,000 the child's basis in the land would be $20,000 plus the tax paid on the $80,000.  Since that tax rightfully belongs to the seller parent, the sale price would now be $20,000 plus the tax paid on the $80,000.  I do not think you can get to where you want to be on this road.

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The unified credit for gifts and remaining estate is based on $10.9m for a married couple.  Is there any chance your clients will ever give away so much and have enough left in their estates when they die that they will exceed that amount?  If not, don't worry about the gift tax!  Just file the 709 and assure them they won't have to pay anything.  Only a few states still have a gift tax and the lifetime exclusions may be lower, so check to see if that will be a problem.  I wouldn't stretch it out over two years because the recording fees etc will probably exceed what you charge for the 709.

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4 hours ago, Randall said:

But wouldn't the gift recipient's basis be the same as the donor's basis plus what they actually paid?

Yes, if the FMV is greater than the basis, then the adjusted basis is used.

"If the FMV is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift"

https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/property-basis-sale-of-home-etc

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1 hour ago, Elrod said:

When the 20,000.00 is paid, title of ownership is transferred, the gift of 80,000.00 is recognized, Market value is still 100,000.00,

Then the recipient's  basis = 100,000.00

I think....b0423.gif

With this being a sale at a bargain price, I don't think we are concerned with the child(ren) picking up basis from the parents. However, that being said, even if it was a 100% gift I still don't think the child's basis would necessarily be the FMV.  It would depend on the parent's basis in the lot is, and we weren't told what that was in this hypothetical case.  If their basis was $40K, then child would step into that, but it could also be that the parent's basis was $110K with a decline in value to the $100K at the time of the gift.  We don't know the parent's basis, but I think in this case with it being a sale at a bargain price, we aren't concerned with that. 

I could be all wrong, but here's what I think happens:

On the parent's side of the transaction, What they did was sell 100% of the interest in the property and the gift is reported only because of the bargain price aspect, so I think the parents will report their entire basis against the sale, whatever that basis is, and they will either have a taxable gain or will have a nondeductible loss under the related party rules. In this hypothetical, it seems that they didn't sell 20% of the interest in the property and gift 80%, so I don't think there is any of their basis that transfers to the child(ren).  This is an undeveloped lot, so the 1021 exclusion wouldn't come into play, but it would if it involved the parent's residence, for example, which isn't that unusual.

Regarding the gift, the annual gift exclusion will take care of some, or maybe all, of the gift depending on the timing and number of donors and donees involved, as we've already touched on above. If there is still a taxable gift after that, next is the application of the the unified credit, so perhaps there would be no taxable gift, but again, we don't know the extent of the parent's estate or prior gifts in this hypothetical, but let's assume that it doesn't create a taxable gift.  What this transaction does is it shifts any future appreciation on this property out of the parent's estate and to the child(ren), which could create taxable income to them in future.

From the donee/child's perspective related to their basis, I think that the child's basis will be the amount paid of $20K plus the typical basis additions if they pay anything related to the lot, either POC or at settlement. Basis would also be increased by any gift tax paid that is attributable to the appreciation in the hands of the parents under sec 1015.

 

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For a gift the basis is the same as the donor's basis, in this case $20k, plus any gift tax paid.  It is highly unlikely any gift tax will be paid because of the unified credit.  The gift tax will be calculated on the FMV at the time of the gift, but after the credit no check will be written so the donee's basis will stay at $20k. 

I think you're getting confused by the rules about gifted property where FMV is lower than basis.  In that case, when the donee sells you have to do some fancy math:

"If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property.

  • Your basis for figuring a gain is the same as the donor's adjusted basis, plus or minus any required adjustments to basis while you held the property.
  • Your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held the property.

Note:  If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property."

In your case, though, the property is appreciated in value  so donor's basis is the donee's basis.  Just file the gift tax return and be done with it.  If the children build a house on the land and live there for a couple of years, they will have a $250-$500k exclusion on the profit anyway, so the chances of them ever having to pay capital gains tax are minimal (in the current tax code).

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