Gifting Question

[NECPA in NEBRASKA]

I don't know a lot about gifting, especially in this family situation. Parents rented house for many years to their son and his family at FMV. In 2003 they sold the house to them in an installment sale. He had been making the payments until he lost his job in 2010 and made no payments in 2011. The parents would like to gift him the house and reduce his inheritance. I told them that they would have to file a gift tax return and that they would be able to make gift amounts to his wife and kids, if they wanted to. My question is what happens to the remaining gain in the installment sale if they gift it to them? Do they just gift it at the balance owed? I do not know what the FMV of the house is now, but I understand that the son hasn't taken very good care of it. I'm sorry if this is a simple question, but I don't normally get into gifting issues and I am really burned out.

Thanks!

[Kea]

I don't know much about gift tax returns, either. But depending on the amount of the payments on the installment sale, the parents could gift the son the amount of the payments each year. Each parent could gift the son up to $13K & he could use that to make the installment payments. No gift tax return & the sale continues as before.

I think that would work, but please let me know if there is some reason it won't - say, if it makes it too obvious that there really isn't an installment sale anymore. Plus it means parents are paying tax on interest they really aren't receiving - so it might not be a good deal for them.

Just throwing it out there.

[NECPA in NEBRASKA]

Thanks, Kea. I don't think that they will want to pay income tax on income tax on money that they are giving out and then just getting it back. He still owes $70,000 and they don't want to throw them out with no where to live. Maybe they can just gift it to him, file the gift return and be done with it. I will have to check after tax season.

[OldJack]

Since the house was "sold" to son on an installment note, father is not gifting a house he is gifting the remainder owed on the installment note. Father has already recognized gain, up to gift date, on the note and now gifts the balance on the gift tax return which calculates gift tax that will never be paid unless fathers estate is in excess of allowed amount at his death. :)

[NECPA in NEBRASKA]

Thank you, Old Jack. I don't believe that his estate will be over the allowed amount.

[jainen]

>>Parents rented house for many years to their son and his family at FMV. In 2003 they sold the house to them in an installment sale.... what happens to the remaining gain in the installment sale if they gift it to them?

For tax purposes there is no "remaining gain." The sale of depreciable property to a related party can not be reported on the installment method. The entire gain was taxable in 2003, and that is beyond the statute of limitations for the IRS to do anything about it.