Gift... no loss???

[Hahn1040]

Client moved his elderly mother to assisted living in fall of 2010

transferred deed of her house to himself December 2010 (he is the only child)

she died 5/2011.  

in 2015  he writes:  .  I transferred the SC house to my cousin.  …For love and $5.  I paid the real estate agent and lawyer the $2000 for the work, and it cost $175 for the transfer fees with the county clerk.

He never did anything with the house during the years he owned it.  Just deducted the Real Estate tax.  

I'm  thinking it was a gift to the cousin and he cannot claim any loss

thanks for your thoughts,

Laura

[SaraEA]

Mom gifted the house to her son, who gets her basis.  He in turn gifted the house to his cousin, who now gets his basis (which is the same as Mom's unless son made some improvements before he gave it to cousin).  Unless, of course, the value of the house decreased below the basis in the interim, in which case there are two bases--basis for loss and basis for gain.  In either case, it is now the cousin's problem when s/he sells the place.  There was no sale from client to cousin, so capital gain or loss is not in the picture.  Cousin is the one who will have a gain or loss when he or she eventually sells.

[easytax]

Curious here???

Transfer is mentioned --- not gifting /// would that be an automatic "thing" or would gift tax (forms at least) have to be filed ---- if no forms, was it a gift???    Also, second transfer was for a stipulated amount --- would that not be the "basis" now?  Also, same question; was gifted if no forms, etc.??

Even with forms, I thought (yes, I could be wrong) that even if the FMV was as an example, say 325K but the sale to child was 212K with the gift tax forms showing the gift of 113K, that the basis would still be 212K if/when child later sold property????  

Second part/// if gift tax not filed, is there a limit of "later" filing that might correct or make it a "gift"? I know, statute of limitations does not start until gift tax is filed (for gift tax purposes), just not clear if gift tax filing can be done in arrears, etc..

NOTE:   Gift tax not my usual and definitely not strong point; so asking both for knowledge and possible need for client correction on my part.

    Thanks in advance.

[mcb39]

22 hours ago, SaraEA said:

Mom gifted the house to her son, who gets her basis.  He in turn gifted the house to his cousin, who now gets his basis (which is the same as Mom's unless son made some improvements before he gave it to cousin).  Unless, of course, the value of the house decreased below the basis in the interim, in which case there are two bases--basis for loss and basis for gain.  In either case, it is now the cousin's problem when s/he sells the place.  There was no sale from client to cousin, so capital gain or loss is not in the picture.  Cousin is the one who will have a gain or loss when he or she eventually sells.

Nowhere does It say that anyone is even living in the house.   Also, since it is not inherited property, how does anyone ever get to take a loss on personal property?

[Jack from Ohio]

53 minutes ago, mcb39 said:

Nowhere does It say that anyone is even living in the house.   Also, since it is not inherited property, how does anyone ever get to take a loss on personal property?

Agree.  No deduction for personal loss if he sells for less than his basis.  If he sells for more than basis, he has a capital gain.

Transfer for less than FMV = gifting of the difference between $ paid and seller's basis.  This is not a difficult or complex thing. 

[SaraEA]

I didn't say the cousin was living in the house.  We don't know what it's being used for.  It could be investment property--maybe to turn into a rental or hang onto and sell when prices are favorable or use for a commercial tax prep business.  If cousin lives in the house and later sells, most likely will be a gain (if mother bought a long time ago and has a low basis) subject to the $250/500k exclusion if cousin lives there long enough.

[mcb39]

12 hours ago, SaraEA said:

I didn't say the cousin was living in the house.  We don't know what it's being used for.  It could be investment property--maybe to turn into a rental or hang onto and sell when prices are favorable or use for a commercial tax prep business.  If cousin lives in the house and later sells, most likely will be a gain (if mother bought a long time ago and has a low basis) subject to the $250/500k exclusion if cousin lives there long enough.

I still agree with OP.  There should never be a loss allowed here for anyone since it was gifted property.  Yes, there most  certainly could and probably should be a gain.

[jklcpa]

Sara's first post is correct that the OP's client gifted the property to the cousin.

Since the OP also brought the topic of loss into the discussion and the gain/loss issue was further expanded upon in Sara's immediate reply and by others, I'll add this to clarify:

In general and not including properties acquired in like-kind exchanges and their dispositions where there are additional rules -

• the basis, and holding period, for gain or loss is determined by its acquisition and additional subsequent costs, (purchase, build, inherit, gift, exchange, etc)
• the character of the gain or loss at disposition is determined by the property owner's intent and reason for holding the property and by his or her use of it during the time of ownership, not by how it was acquired.  (personal primary residence, 2nd residence, vacation rental, other income-producing use, 100% rental with no personal use, other income-producing use, investment property held for its appreciation, etc.)

With respect to gifts of property, we're hopefully all familiar with what is commonly known as the carryover basis rule where the donee "steps into the shoes" of the donor with adjustments for gift and GST taxes paid. That is true except for those gifts whose basis has declined in value below the donor's cost, and those are the cases where we end up with dual basis triggered by code sec 1015(a).

Sec 1015(a) is how the tax code places a limitation on the gifted basis so that a loss cannot be transferred by gift from donor to donee, and no one can ever deduct that portion of a loss. If and when the recipient disposes of the property and does incur a loss using the lower basis under the dual basis rule, the loss is limited to the the amount of loss beyond the reduced (dual) basis for computing the loss.  In other words, the recipient would never get the benefit of the decline in value from the original donor's cost to its lower FMV at the time of the gift, but CAN take loss beyond that once in his or her ownership.