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Level 3

Investment Property Gifting to Child

I am helping my grandmother and mother with some tax planning. My grandmother purchased a property many years (30 - 40) for her daughter (my mother) and this was seen as an investment property since it was not her home. Several times since then, a 1031 exchange was conducted and my mother was later added as a 1% owner of one of the properties. My grandmother wants to gift the property 100% to her daughter so she does not have to keep up with all the house stuff any longer as she is in her 80s. I am trying to see what the tax implications are to my grandmother or mother. My mother is single and the current property has a value of about $350,000 with about a $200,000 mortgage. Roughly $150,000 was transferred to the current property last year and the basis is around $20,000. Thanks!

7 Replies
Level 18

Investment Property Gifting to Child


@musicmike wrote:

I am trying to see what the tax implications are to my grandmother or mother.....the basis is around $20,000....


Then your mother would take your grandmother's basis in the property (around $20k) and that would almost certainly not be the best result. Thus, you should seek guidance from an estate planning professional who will definitely offer you better options (such as a transfer on death deed or your grandmother retaining a life estate with your mother having a remainder interest).

Level 20

Investment Property Gifting to Child

From a tax standpoint I would never even suggest the gifting of real estate of any type (commercial, investment, rental, personal use, etc.) to a heir. My main reason for that is because when you gift the property, you also gift the "original" cost basis of the property from the giver. So what the property may be worth now doesn't mean squat for the recipient really. It can actually hurt the recipient tax-wise years down the road when they sell or otherwise dispose of the property.

So if your grandmother's cost basis is $3000 from 30 or more years ago and she gifts it to someone before she passes, the fact the property may be worth $300,000 now doesn't matter. The gift recipient also receives the original cost basis of $3000. So if later down the road the gift recipient sells the property for say, $250,000, that means they will be paying taxes on a $242,000 gain which will put them in a significantly higher tax bracket and automatically disqualify them for quite a number of possible tax deductions that year, because their income from all sources will just be to high.

I would suggest that your grandmother leave it to her daughter in her last will and testament.In the meantime, her daughter can just manage things on her behalf, as I would assume the rental income is enough to cover to mortgage payement and property taxes. If the gransmother "gifts" her daughter the rental income left over after paying the mortgage and property taxes, then so long as it's less than $15K per year, nothing concerning this cash gift needs to be reported to the IRS or anyone else for that matter.

So let the daugher manage it while Grandma still reports everything on her tax return. When the grandmother passes, her daughter will inherit the property and she will also "inherit" the fair market value of the property on the day the grandmother passed, as her cost basis - which will be a hell of a lot more than a "gifted" cost basis. Additionally, all prior depreciation already taken on the property by the grandmother is basically wiped clean and just "disappears" into la-la land so that no depreciation recapture is required.

So if the daughter "inhertits" it, and also gets the higher cost basis of say $300,000 for example, she can sell it for $300,000 or less and not pay one single penny of tax on that money.

 

 

Level 3

Investment Property Gifting to Child

Thank you Carl! Great answer!

Level 3

Investment Property Gifting to Child

One last question regarding this. Is there any difference if the said property was gifted from my grandmother to my mother and she were to live there as her primary residence for the next five years or longer?

Highlighted
Level 18

Investment Property Gifting to Child


@musicmike1 wrote:

One last question regarding this. Is there any difference if the said property was gifted from my grandmother to my mother and she were to live there as her primary residence for the next five years or longer?


It is at least two years out of the five years prior to the date of sale (i.e., she does not have to own and live in the house for 5 years or longer to qualify for the Section 121 exclusion).

 

Regardless, if it is just your mother on title and she uses the house as her principal residence, she can only exclude $250,000 of gain.

 

See https://www.irs.gov/taxtopics/tc701

Level 20

Investment Property Gifting to Child

If the owner named on the deed lives in the house for at least two of the last 5 years they owned it prior to the sale, they qualify for the $250K capital gains tax exclusion.

Now understand that does not mean they have to own the property for 5 years. There is no minimum on the number of years owned. There *is* a minimum on the number of years lived in as their primary residence.

So of the named property owner owned it for 25 months, thats two years and one month. So long as they lived in it for "at least" 24 months (2 years) as their primary residence, they qualify for the exclusion.

Also understand this:

 - WHile we talk in months/years on this, the IRS counts days, and the look back day count starts on the closing date of the sale. The seller must have lived in the property as their primary residence for at least 730 days, of the last 1826 days they owned it. Note also that the days lived in as primary residence do not have to be consecutive either.

With it comes to non-consecutive days of having lived in the property as their primary residence, that's where the IRS looks at months. So if they moved in on say, Jan 1 and moved out on Jun 16th, they get to count the whole month of January and the whole month of June. However, if they moved out on Jun 14th, then they do not get to count one single day of the month of June.

Level 18

Investment Property Gifting to Child


@Carl wrote:

With it comes to non-consecutive days of having lived in the property as their primary residence, that's where the IRS looks at months......


Is there any authority for that proposition?

 

All I have currently is the following from Treas. Reg. §1.121-1(c)(1):

 

Ownership and use requirements -

In general. The requirements of ownership and use for periods aggregating 2 years or more may be satisfied by establishing ownership and use for 24 full months or for 730 days (365 × 2). The requirements of ownership and use may be satisfied during nonconcurrent periods if both the ownership and use tests are met during the 5-year period ending on the date of the sale or exchange.