@tagteam wrote:
@Hal_Al wrote:
@AmeliesUncle
No citation. I'm going by the cost basis, in a gift, being the giver's basis; which I believe includes the giver's holding period, and depreciation previously taken by the giver.
Per Section 1223(2), the holding period of the donee would include the holding period of the donor provided the donee also takes the donor's adjusted basis per Section 1015(a). I would tend to think, in that case, everything else would follow, including the type of use, but I cannot seem to locate any authority for that proposition (i.e., that the type of use carries over with the gift).
On the other hand, Section 1223(2) would appear not to be applicable in the event the FMV was used as the donee's basis. In that instance, the donee's holding period would appear to begin as of the date of the gift.
I don't see that as being an answer to whether the gain is subject to the non-qualified use rules under §121(b)(5), because section (b)(5)(B) only talks about ownership by the taxpayer, and not holding period. Certainly the brothers would have their father's cost basis, including depreciation to deal with.
Consider the following 3 situations.
(1) The father has used the property as a rental for 30 years, moves back into the home for 2 years as his main residence, then sells it. Original cost basis was $100,000 with $20,000 allocated to land value, the property is fully depreciated. Property sells for $500,000. Due to the non-qualified period rules, the father can only exclude 20/32 of his gain (the 12 years between 2008 and 2020 are non-qualified). The total gain is $480,000. The first $80,000 is taxed as recaptured depreciation. Of the remaining $400,000 of gain, $250,000 is eligible for the father's exclusion and $150,000 is taxed as LTCG.
(2) The father's details are the same, but the father gifts the home to his sons, who live in the home for 2 years as their main home. They qualify for the exclusion and the non-qualified period rules do not apply. The total gain is $480,000. The first $80,000 is taxed as recaptured depreciation. Of the remaining $400,000 of gain, it is all eligible for the exclusion, and assuming the brothers are each 50% owners, they can each exclude the $200,000 of gain on their share. (But they each pay recapture on $40,000.)
(3) The father's details are the same, but the father gifts the home to his sons, who live in the home for 2 years as their main home. They qualify for the exclusion but we will apply the non-qualified period rules in this example. Due to the non-qualified period rules, they can only exclude 20/32 of his gain (the 12 years between 2008 and 2020 are non-qualified). The total gain is $480,000. The first $80,000 is taxed as recaptured depreciation ($40,000 per brother). Of the remaining gain, $150,000 is eligible for the exclusion (half to each brother as LTCG) and $250,000 is eligible for the exclusion.
Certainly scenario 3 is closest to 1 in terms of how much money the IRS gets. But section 121 still only says owner, not holding period. (Section 121 does cover depreciation in (d)(6).)
So go see an Enrolled Agent or other experienced licensed tax professional before you decide what to do.
