I gifted rental real estate and completed all questions regarding disposition and dates; is there a capital transaction to report on sch D?

[carol_fredenburg]

The property gifted was held long-term - approx. $90,000 cost less approx. $30,000 depreciation.  I will have a gift tax return done but I want to make sure there is nothing else to be reported on my 1040.  Sch E assets are noted as disposed, but nothing flows to any other form - 4797 or Sch D.

[PaulaM]

Be certain to indicate under the Property Profile section that you 'sold' the rental as well as under the asset/depreciation section. In the asset/depreciation section mark that the rental was sold/retired and indicate that 'special handling is required'. The disposition should still be recorded on Form 4797.

Let me know if this helps.

[carol_fredenburg]

Not sure.  I read that f the 'sold' box is checked, the entire transaction is considered to be a fully taxable transaction and losses are not limited to passive activity rules. I think passive activity rules apply to my rental properties, so I did not check the 'sold' box.  In the asset section, all questions answered as to acquisition and disposition dates, and special handling needed.  I think I need to read up on passive activity rules - I don't think I can take a loss on my gift of close to $60,000.  I'm just not sure if all this is reported correctly on my 1040.

[Rick19744 · Accepted solution]

You have a fairly complicated transaction here so I will provide some guidance:

1. If you have suspended passive activity losses,  these losses will only be deductible when a taxpayer has a fully taxable transaction / disposition.
2. A gift of property is not a fully taxable disposition and as such, does not allow you to free up your suspended losses.
3. If the taxpayer transfers his interest in a passive activity by gift, any suspended passive losses generally increase the recipient's basis in the activity. This basis increase is deemed to occur immediately before the gift.
4. When property that is acquired by gift is ultimately disposed, the FMV limitation rule comes into play.
5. The donee's adjusted basis for computing loss on the sale is the lesser of carryover basis (which would include the suspended losses) from the donor, or FMV at the time of the gift.  In this case, if the property was sold at a loss any suspended losses added to the basis that exceeded the FMV at the time of the gift will be lost.
6. To eliminate the asset from your records, just record this as a sale with no gain or loss; selling price equal to your adjusted basis at the time of the gift.
7. What I am not sure of is how to avoid the suspended losses from being triggered in TT and to eliminate them from your return.  Hopefully one of the TT individuals following this post will be able to provide assistance in this area.