I would HIGHLY suggest you consult with a CPA on this. First, you have to know the value of the property on the date you received it, in order to take the correct depreciation on it each year, as required by law. Your depreciation value is based on the "LESSER" amount of FMV at the time it was available for rent AFTER you received it, or what you paid for it. Since it was gifted to you, one would technically thing the "lesser" value to depreciate on would be zero. But that's not so.
Since I'm sure the property is worth more than $14,000, the giver of this gift is required by law to file a federal gift tax return and pay taxes on their gift to you. The recipient of the gift pays no taxes on it at all. But I'm talking about federal income taxes - not things like property taxes and the such.
As the new deeded owner of the property, you need to know it's FMV for depreciation purposes. THe best way to get that, is to have it appraised by a qualified, licensed, certified property appraiser. An appraisal will cost a few hundred dollars is all.
Do note that I am NOT talking about your county property appraiser. The county property appraiser does not appraise property for fair market resale value. They appraise property based on square footage of land, and square footage of living space for the sole purpose of determining it's value for property tax purposes - NOT for FMV sale purposes. So you can NOT use the value of your county's property appraiser for depreciation.
You will need the FMV of the property on the date the property was "available for rent" upon it's being deeded to you, or as close to that date as possible.
You depreciate the LOWER of (1) Fair Market Value when YOU made it available as a rental (probably the Gift date), and (2) the Adjusted Cost Basis.
For a Gift, the Adjusted Cost Basis is the LOWER of (1) Fair Market Value on date of Gift, and (2) Your parents' Adjusted Cost Basis (usually purchase price, plus improvement, minus depreciation that they were able to take).
So in most cases, you depreciate your parents' Adjusted Cost Basis, not the Fair Market Value.
makes sense, and saves the expense of an appraisal. I myself would still want an appraisal to cover myself in case of audit in the future.
I agree that an appraisal would be a good idea. Not only does it verify what should be depreciated (and the receiver's Basis), it would be used for the Gift Tax return.
I didn't even think about the need to have that for the gift tax return. So I guess it would be smart to get the property appraised, either way you look at it.
Do I input this into turbo tax just like I had purchased the property? I don't see where to input this information?
Also, they gifted it to me 12/21/15, the property was currently rented. However we did not start receiving the rent until 1/1/16. Does this mean it was "available for rent by us 1/1/16 and don't put it on my tax return as a rental until 2016?
For depreciation, yes, you would enter the basis (probably your parent's Adjusted Basis) as if you had purchased it. When you sell the property, it may be more complex than that.
You owned it and it was available for rent on 12/21/15. It goes on your 2015 tax return.
TO help clarify, when you collected rent, and when it's available for rent are two different things. For example, if you were moving out of your primary residence and going to convert it to rental.
Date of conversion to rental - Usually the day after you move out.
Available for rent - the first day a renter "could" have moved in.
Generally, when you move out of a house that was your primary residence, it can take a week or more before it's in shape for a renter to move in. You may need to paint, fix that leaky faucet in the bathroom, clean the carpets, and other stuff.
So the date of conversion is the date one day after you move out. That's when you start getting it ready to rent. After a week, it's ready and you put that FOR RENT sign in the front yard. It is on that day, "available for rent". Now, it could take you months to actually get a renter you're comfortable with and that's comfortable with you as a landlord. But your deductible rental expenses start on the day it was "available".
In your case, there is no "conversion" because it was a rental on the day you got it. So on that initial screen you would select the option to indicate that you "purchased this asset new" on the date the deed was transferred to your name. Days rented would be 12 days, and days of personal use would be ZERO since you never lived in the house for one single day in 2015.
If this is your first experience as a landlord, I have tons of notes from my 24 years of doing this, and would be happy to provide you a copy if desired.
Generally ,If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property.
Section 1015(a). This section states, in pertinent part, that for property acquired by gift, "the basis shall be the same as it would be in the hands of the donor...except that if such basis is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value."
When and if you sell later:[any gift of depreciated property will trigger the so-called dual basis rules ]
you must know three amounts:
The adjusted cost basis to the donor just before the donor made the gift to you.
The fair market value (FMV) at the time the donor made the gift.
The amount of any gift tax paid on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
In Turbotax you will need to know the donor's basis they used for deprecation and date placed in service and use those number [hopefully they correctly separate land value ,land is not depreciated]
Bill, what are your thoughts on this situation?
My parents bought a rental property in 1980s for 50K. they did a 1031 exchange and bought a new rental property 4 years ago for 250K (same price as what they sold original for). they are now gifting me the property (inheriting is not option). I understand that the capital gains tax burden goes over to me when I sell, but what happens if I turn a gift rental into my primary residence and live in for 2 years. Can i get the 250K exemption and not pay any tax on difference between 50K original and 300K sale (future estimate)? I also understand that a 1031 exchange requires you to hold property 5 years and rent for 2, but with a gift of it, does that rule go out the window?
thanks Darren
Much of the below you already understand. I'm just putting it into words for the benefit of other readers, as well as to confirm we're both on the same page. Also, at best I am "vaguely" familiar with 1031 exchanges. I just don't have the experience or knowledge of 1031's to be any kind of authority on it, though I do know "the basics."
Your cost basis is $50K. Period. Your parents did the 1031 exchange for the primary purpose of deferring paying tax on the $200K gain. So if they gift the property to you, they gift *EVERYTHING* including all prior depreciation as well as the deferred gain. So if they're gifting it to you, they are also gifting the original $50K cost basis, all prior year depreciation they've already taken, as well as the $200K they have not paid taxes on yet (but you will pay taxes on when/if you sell the property in the future.)
Now if the original purchase date was 1980 then depending on the date of the 1031 exchange, more than likely the property is already fully depreciated. Doesn't matter. You still have to "take" all that depreciation when you receive the property and *YOU* will pay taxes on that deprecation *no* *matter* *what*.
if I turn a gift rental into my primary residence and live in for 2 years. Can i get the 250K exemption and not pay any tax on difference between 50K original and 300K sale (future estimate)?
Yes. If married, it would be best for it to be gifted to both you and your spouse. Then if you both live in it for at least 2 of the last 5 years you own it, you will each qualify for a $250K capital gains exclusion for a total of $500K
I also understand that a 1031 exchange requires you to hold property 5 years and rent for 2, but with a gift of it, does that rule go out the window?
That rule doesn't apply to you. The required minimum holding period of the replacement property after the exchange is 2 years, and that requirement is on your parents since they did the exchange. If they gifted it to you before meeting that requirement, then the difference in the original cost basis and the exchange value cost basis is taxable income to them - not you. It's taxable to your parents in the tax year the gifting was done. In such a case that increases the cost basis they gift to you to the exchange value declared at the time they did the 1031 exchange.
The requirements on you are that the property must be your "primary" residence for at least two of the last five years you own it. So at a minimum, you would have to own it at least two years, and it would have to be your primary residence for those two years. Understand that many misinterpret the requirement thinking they have to own it for 5 years. They do not. If you only own it for say, three years and it was your primary residence for "two of the last five years", then it qualifies for the exclusion. The fact you only owned it for three years is irrelevant. You still meet the requirement.
Keep in mind also, that you must not have taken the exclusion on another property within the previous 2 years.
Oh one more thing. Your parents will also need to file IRS Form 709 - Gift Tax Return with the IRS since the value of the gift given in one tax year exceeds $15K. Don't let the name of that form fool you either. They will *NOT* pay taxes on what they gifted to you. But by law they are "required" to report it to the IRS since the value exceeds $15K.
Wow,
thank you so much for your prompt and detailed response. I really appreciate that and thank you for your service to our country. When they gift me the rental property house they asked me what they should list as the transaction price. Is there any strategy there?
thanks Darren
When they gift me the rental property house they asked me what they should list as the transaction price. Is there any strategy there?
Yep. If they give it a transaction price of $250K then they (the parents) have to pay taxes on a $200K gain. In such a case it's not a gift. It's a sale. They pay taxes on the $200K gain and *your* cost basis is $200K with your depreciation starting in the tax year of the sale.
If they value the gift at their original purchase price of $50K then it's truly a gift. While they will report the $50K gift to the IRS, nobody pays taxes on the gift. Your cost basis on the gift is the same at $50K. Keep in mind they also gift you all the prior years of depreciation they've taken too. So when you sell, anything over $50K is a gain to you. Weather you pay taxes on that gain or not depends on weather it not it is/was your primary residence for at least any 2 of the last 5 years you owned it. With this scenario since the property was originally purchased in 1980 for $50K, I have no doubt that the property is already completely depreciated. So when you sell the property you will be required to recapture that $50K of depreciation and pay taxes on it. Recaptured depreciation is not and can not be included in the capital gains exclusion. You will pay taxes on that recaptured depreciation *no* *matter* *what* you do.
If I was the parents, I'd gift it to you for $50K and let the future taxes be your issue when you sell.
No party to this transaction is permitted to decide which valuation is used for the purposes of the value of the gift; the value of the gift is its fair market value on the date of the gift, not the adjusted basis of the donor.
The fair market value of the property on the date of the gift is the value used for reporting the gift on a gift tax return and also used to figure a loss on a future sale if the fair market value should happen to be less than the donor's adjusted basis of the property at the time of the gift.
Your basis for all other purposes is your parents' adjusted basis in the property which, as has been mentioned here and in your other thread, is most likely just the original cost of the land (since any structures have already been fully depreciated).
I see,
thanks for that update tagteam. I see, so I can use Zillow to determine FMV? then they would not pay tax on the gift (difference between 50k and 300K FMV) either in this case because they would use the "gift exemption of 11.2 lifetime" or because I would be the one taking ownership of that liability?
thank you very much
Darren
the value of the gift is its fair market value on the date of the gift, not the adjusted basis of the donor.
Right. I didn't clarify that. Just keep in mind that you also have to take as a gift, all the prior year's of depreciation too.
@darren5v1 wrote:thanks for that update tagteam. I see, so I can use Zillow to determine FMV?
I would not do that in this instance. Rather, I would pay for an appraiser by a certified (licensed) appraiser or, at the very least, a competitive market analysis (CMA) by a licensed real estate broker/agent.
@darren5v1 wrote:...they would not pay tax on the gift (difference between 50k and 300K FMV) either in this case because they would use the "gift exemption of 11.2 lifetime" or because I would be the one taking ownership of that liability?
Your parents would not pay gift tax because of the lifetime exemption (with the presumption they have not yet exceeded it). You, on the other hand, and as has been mentioned, will be responsible for any gain which includes accumulated depreciation deductions (unrecaptured Section 1250 gain) upon a sale of the property to a third party.
Hi,
If I dont want to actually live in the house for the 2 years that are required to avoid the original capital Gains, Can I still rent it out legally, withdrawing my primary residence with city, paying the higher property taxes and insurance rates, just not claim exceptions for those 2 years and claim as primary residence on tax returns?
My other backup plan would be to just claim as primary residence with city (not insurance) and rent under table to someone on craigslist. Still not claiming exemptions on tax returns
thanks
Darren
If I dont want to actually live in the house for the 2 years that are required to avoid the original capital Gains, Can I still rent it out legally, withdrawing my primary residence with city, paying the higher property taxes and insurance rates, just not claim exceptions for those 2 years and claim as primary residence on tax returns?
What you are proposing is blatant tax fraud punishable by a $10,000 file, 5 years imprisonment, or both. don't go there.