@tagteam wrote:
Since, as a result of the gift, the brothers will take their father's basis, holding period, and depreciation deduction (recapture liability), why would it not follow that they would also have to take their father's type of use into consideration? Is there authority stating otherwise?
Because I don't see anything in section 121 that would apply the tacking rules to the non-qualified use rule. It just says
"(B)Gain allocated to periods of nonqualified use
For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which—
(i) the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to
(ii) the period such property was owned by the taxpayer."
I agree the intent was probably to prevent the owner of a rental property from converting a taxable sale into a less-taxable sale by gifting the property. But I don't see it in that section. (Curiously, the inherited step-up rules supersede all of this and would make the sale completely nontaxable no matter how much depreciation was taken, so one could equally ask from the other side, if Congress wants to tax taxpayer B for non-qualified use by taxpayer A, why didn't Congress carve out an exception in the step-up rule.)
Also, there is the gift of equity to consider. If the father has exceeded his gift exclusion limit, then the gain gets taxed twice, once as a gift and once by the operation of the non-qualified period rule against the gift recipient. That doesn't sound fair.
Bottom line, I figure that if Congress wanted depreciation AND the non-qualified use period to follow the property to the new owner, they should have said so. As far as I can see it just says "the period such property was owned by the taxpayer" and these taxpayers won't have a non-qualified use during the time when they own it.
But I am not a lawyer nor an EA. I almost kept myself out of this one, and I probably should have.
