basis for property that was gifted to my wife three years ago in India for US TaxPayer

[airdisc]

I have a question regarding the basis for property that was gifted to my wife three years ago in India. She now wants to sell it, and we are at loggerheads determining the basis, as the property itself is over 50 years old and reflects a tiny purchase amount, which will create devastating capital gains for us if true. Based on some research, some say the Fair Market Value at the time of the gift can be used, or the official ready reckoner by the government​ at the gift time.

[pk · Accepted solution]

@airdisc , Namaste ji

(a)  we need to distinguish between gift and inheritance ----- I am aware  that in India  we often do not make a distinction e.g.  a grandfather may say I want this prop to go to my granddaughter but the actual transfer  does not happen till after passing of the grandfather.

(b) under US  tax laws,  a gift is a transfer  from a living donor to another and in such case the basis of the  asset so transferred  in the hands of the recipient is  the same as that of the donor.  Under some circumstances  it can be lower of FMV and that of the donor.

(c) an inheritance  i.e. transfer after the passing of the decedent, always has a basis  ( for the recipient) equal to FMV at the time of passing of the decedent.

Therefore it is very important to determine whether this transfer to your spouse  is a "gift" or "inheritance".

I am aware that under current Indian tax laws you still have  two  different  regimes  --- indexed and at 20% or un-indexed at 12.5%.  Us does not have any indexing  and  it is pure diff.  between  sales proceeds  and basis but generally at capital tax rate.

Hope this answers your query. Is there more I can do for you ?   You can always PM me ( just no PII -- Personally Identifiable  Information please ) .

Namaste ji

pk

[airdisc]

Thank you for your assistance. I would like to clarify the basis of the asset in question.

Given that the property is over 50 years old, the Indian Government acknowledges the difficulty in accurately determining its original price. As such, the basis for valuation has been set to the property's worth on April 1, 2001. Typically, indexation would commence from this date.

As we discussed and agreed, we will not be applying indexation. However, I would like to confirm if we can still use April 1, 2001, as the basis for the property's valuation, especially since it was transferred via a gift deed prior to her grandfather passing.

[pk]

@airdisc , absent any other data/details, if Govt. of India  IT is using 2001 as the basis, then that is the best figure you have.  And use that for the US filing purposes.  Just keep records of how you got that figure.

Note that if the prop. was used for in come generation during your wife's ownership, then you would need to recognize  any allowable depreciation ( for purposes of gain calculation and recapture). 

Is there more I can do for you ?

Namaste ji

pk

[AmeliesUncle]

---

@pk wrote:

 absent any other data/details, if Govt. of India  IT is using 2001 as the basis, then that is the best figure you have.  And use that for the US filing purposes. 

I disagree.   The government of India allowing a certain amount as Basis does not affect how the US views Basis.  

Absent any other details/data, Basis is zero until a reasonable estimate can be established.  With that being said, MAYBE the government of India is allowing the 2001 Basis because valuations in that area in 2001 are similar to the valuations in1970s.  But unless/until that is established, you can't use the 2001 amount.

[pk · Accepted solution]

@airdisc , whereas I agree with my colleague @AmeliesUncle , that absent any documentation etc. the basis of prop. is assumed to be zero. However, I am comfortable  in my opinion ( and knowing how things work in India and dearth of info often ) that the use of  basis as established by GoI, is  valid for purposes of US taxes on alienation of asset.  Just have all the documents available in case IRS challenges the basis determination.   That is where I stand.

Is there more I can do for you ?

[airdisc]

Thanks again for your feedback after the extensive research. I really appreciate it.

The recipient in this case my wife generally uses the original owner's cost basis per IRS guidelines, and the original cost basis for this asset has been moved to 2001 per India Govt Guidelines. Therefore, as stated, with a certificate in hand confirming the asset cost basis as of 2001, we should be good to go and will proceed.