income from the sale of a gifted asset

[mike8408]

My wife (we file jointly) received income in 2022 from the sale of a piece of real estate gifted to her some 35 years ago by her father prior to his passing.  Tax due?

[MinhT1]

The cost basis of this gift is the original cost basis of the donor, i.e. the price your father-in-law paid for the property. If you do not know it, you have to make an educated guess.

If the sale is for less than the cost basis, then you made a loss on personal property and the loss is not deductible.

If the sale is for more than the cost basis, you have to report the sale as the sale of a second home and pay long term capital gain tax on the profit from the sale.

Please read this TurboTax Help topic on how to report that sale.

[mike8408]

Thank you.  The property is a (still) unimproved 10 acre lot in an unincorporated area.  We have been paying the taxes on the property since it was gifted.  How do we value the property at receipt?  We can refer to the tax records...would that figure be acceptable?  Could we use the last (current) tax value as the cost? We received only a personal check from the buyer for the agreed to price....no tax form(s).

[ThomasM125]

Your cost basis would be the value of the property when you acquired it. You may be able to estimate that by looking up the valuation online at the property appraiser's office in the county the property is located in. You could have added the property taxes you paid on the property to the cost basis for each year you owned it, but you would have had to make a yearly election on your tax return to do that. You can add closing costs to the cost basis.

[mike8408]

Got it...thank you.  Should we have receivced a 1099 from from the buyer?  (we did not)

[KrisD15]

If the sale was handled by a Title Company, they may issue Form 1099-S. 

Then again you may receive no 1099. 

If you were to get a 1099-S, it should have been received by now. 

You might check with the person that facilitated the transaction, but you can report the sale with or without a 1099 on your tax return.

[Carl]

In my county I can look up everything about a property on the county property tax appraiser's web site. I would expect chances of you being able to that are fairly good.

You should be able to get the donor's cost basis at your local property tax appraiser's office. If the property was originally purchased by the donor prior to 1980, chances are 50/50 you will find the information online. But if you visit the property tax assessor's office, they should have all the information you need, including what was paid for the property when the donor originally purchased it, since the buyer had to pay transactional taxes based on what they paid for the property.

Take note that tax values should not be used as a cost basis, as those values assigned by the county property tax appraiser are generally 30% below the real market value. Besides, the tax value for 2022 is probably significantly more than it's tax value 35 years ago, and even more than what was originally paid for it by the donor 35 years ago.

Bottom line is, you need to be able to substantiate your cost basis if ever audited on it. Using the assessed tax value is frowned upon unless you can prove you tried every other means possible first, to get whatever value you're required to use as cost basis for reporting the sale.

I've never heard much about the IRS checking this out. But I myself am not willing to test it. 🙂

[mike8408]

Thanks to all that have offered help.  I am still unsure as to how to show the information on my tax return.  Her is the information thta I've been able to find at the county office:

Originally purchased by my wife's father in 1972 (10 acres of undeveloped land) ' $1000

"Sold" to his (3) children prior to his death in 1993 $1

One child deceased, remaining (2) purchased the property in 2005 $1

Sold by the (2) remaining children (one is my wife) in 2022 $32,000 (Each receiving $16000 directly from the buyer via personal check

NOTE: we began paying taxes on the property (still undeveloped) in 1994 and did so until it was sold in 2022, the amounts were small, split by the (2) owners, and I do not believe that they were claimed on ther tax returns.

??????

[Carl]

From what I've been told (having never experienced it myself) is that the $1 transaction fee indicates the property was either gifted or inherited.

Typically, if the transfer date is a date after the passing of the owner, then most likely it was inherited from that prior owner after they passed. (with a $1 transaction fee)

If the transfer date is a date before the passing of the owner, then most likely it was gifted from that prior owner, before they passed. (with a $1 transaction fee)

So your cost basis could be the original $1000 paid for it. Otherwise, if you can determine that somewhere in the custody/ownership chain the new owner inherited it after the prior owner passed, then the cost basis used would be the FMV of the property on the day the prior owner passed away.

Assuming the original purchase price of $1000 is the cost basis to be used, with your wife a 50% owner her share of the cost basis would be $500. Having sold it for $16,000 the gain would be $15,500. From that gain she can subtract her share of the selling expenses and she pays tax on the remainder.

Property taxes paid on the property during her period of ownership are not deductible from the gain. That's because those property taxes were deductible as a SCH A itemized deduction for each year she paid her share of those taxes, during the time she owned the property. If she didn't take that deduction each year, or if her itemized deductions never exceeded the standard deduction, that doesn't change this.

[Anonymous_]

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@Carl wrote:

From what I've been told (having never experienced it myself) is that the $1 transaction fee indicates the property was either gifted or inherited.

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That is standard language in deeds (e.g., "$10 and other good and valuable consideration"); it has nothing to do with being a gift or inherited and the "transaction fee" would virtually never be as low as $1.

[Carl]

I'm confident the taxing authority has records that will show the details of each and every transfer of ownership. Regardless if the property was gifted or inherited, the records will reveal that.

[Anonymous_]

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@Carl wrote:

I'm confident the taxing authority has records that will show the details of each and every transfer of ownership. Regardless if the property was gifted or inherited, the records will reveal that.

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Except for this, which could be relevant depending on the exact details:

One child deceased, remaining (2) purchased the property in 2005 $1

We do not know how much the remaining 2 paid (if anything) to buy out the other party.