Rental Properties - Parent to Child Transfer

[Saravia]

Hi Everyone, 

I have two clients parents and adult child, they owned rental properties together. 

1. Parent 1 transferred their 50% of the rental properties to adult child before passing away late 2019. My understanding nothing was reported to the IRS in regards to the transfer. In 2019, adult child reported 100% of the rental income to the IRS, and depression was left the same as 2018. What is the correct way to handle this? Should anything have been reported to the IRS?

2. Parent 2 transferred primary resident to adult child in 2020 - parent 2 continues to leave there. Does anything need to be reported to IRS, if so, what should they report?

I appreciate the input.

Thanks, Pat

[DANRVAN]

21 hours ago, Saravia said:

What is the correct way to handle this? Should anything have been reported to the IRS?

As I understand it, the child received 50% as gift and inherited the other 50%.

The basis of the gift portion is 50% of parent's basis (assuming fmv is higher).  The child can continue to use parent's holding period for depreciation or restart the clock; there is no authority that says it has to be done one way or the other that I am aware of.

For the inherited portion, child gets step up basis and a new holding period for depreciation.

In regards to the gift, you need to verify that a legal and complete transfer was made, otherwise child can take a full step up in basis.

21 hours ago, Saravia said:

passing away late 2019.

For 2019, income and depreciation is reported on final return for parent from Jan 1 until date of death.  For the remainder of the year it is reported by child (or estate if there was one).

 

21 hours ago, Saravia said:

2. Parent 2 transferred primary resident to adult child in 2020 - parent 2 continues to leave there. Does anything need to be reported to IRS, if so, what should they report?

Nothing to report. It appears parent retained a life estate in regards to the personal residence.

[Saravia]

thanks for the comments. 

For the rental properties they purchased them back in 2000 - 50% parents and 50% the son. 

So technically in 2019 when they did the "Parent to child transfer" the parents only gifted their 50% since the son owned the other 50% already. 

On Son Tax Returns - for example if the house purchase price was $100K, so the each owed $50K. but at the time of the transfer FMV was $300K. 

1. Would he now depreciate on a value of the property of 200K (50K 50%original purchase price  + 150K FMV at the time of the transfer)? 

2. Would parent have had to report anything in 2019  on their tax return?

 

 

 

 

 

[DANRVAN]

20 minutes ago, Saravia said:

For the rental properties they purchased them back in 2000 - 50% parents and 50% the son. 

So technically in 2019 when they did the "Parent to child transfer" the parents only gifted their 50% since the son owned the other 50% already. 

That changes things.  

So son owned 50% all along and the remainder was gifted to him before parent died?

If it was a complete and legal transfer then be takes parent's basis on date of gift since fmv was higher than basis.

Parent will report income and depreciation from Jan 1 until date of gift on final tax return.   

[DANRVAN]

45 minutes ago, DANRVAN said:

The child can continue to use parent's holding period for depreciation or restart the clock; 

Son will need to keep track of depreciation allowed or allowable by parents for any 1245 or 1250 gains.

 

[Saravia]

Perfect. I appreciate the help. 

I was under the impression parents needed to report and pay taxes on the "Gift".

 

 

[DANRVAN]

1 hour ago, Saravia said:

I was under the impression parents needed to report and pay taxes on the "Gift"

You are correct, a gift tax return is required.

However, parents probably will not owe any gift tax.