Tax on giving rental property as a gift

[newuser9]

I am trying to gift a rental property to my parents. The property still has a mortgage on it but the bank will allow them to assume the loan.

So would this be consider part gift part sale? If part sale which portion am I selling to my parents? Say if my loan is 100k then would the price of the house be considered sold for 100k?  

The property was purchased for 150k and now its worth 250k.  I took about 40k of depreciation. So if my parents assumed the loan of 100k.  Wouldn't I have a net loss?  I know I can't claim loss on this but just want to make sure there isn't any taxable gain either.

Original Cost 150k - Depreciation 40k - Loan 100k (Sale portion)=(10k) net loss?  So does that mean I won't have any capital gains on this transfer?

Is my calculations above correct or at least in the ball park?

I know I need to report the gift part on form 709 which turbo tax doesn't support but how do I report the sale portion of the transaction in turbo tax?

Also for Form 709, what kind of supporting document I need for the Adequate Disclosure requirement?

As for the Fair Market Value, do I need a certified appraisal? or could I find recently sold houses around that area and get an average to use as the FMV?

[tagteam]

You posted the same message in another thread and were advised to consult a tax professional. One of the reasons being is you do not appear to have a good handle on the difference between the federal gift tax schema and the income tax schema; they are completely different and need to be differentiated.

For one thing, you need to look at your purported $250k fair market value solely from the standpoint of gift tax and preparing and filing a gift tax return (Form 709); that valuation has nothing whatsoever to do with the income tax consequences resulting from the sale component (i.e., the sale to your parents).

On Form 709, for example, your gift will be valued at the fair market value on the date of the gift less the outstanding balance of the assumed mortgage (depreciation deductions you have taken do not factor into the value of the gift). You should definitely have a certified appraisal done for the valuation on the date of the gift.

Per Section 1.1015-4(a), your parents (the transferees) will take a basis of $110k, which is essentially your adjusted basis since $110k is greater than the $100k outstanding balance of the mortgage (they are assuming)

This should get you started, but you do need to consult with a local tax professional as there are other issues, including state taxation.

[newuser9]

My state doesn't have gift tax.  At least that's what I read online.

Should I consult a local CPA because I am currently living in another state.

So to understand this correct, the gift portion will be 250k-100k=150k.  The sale portion will be the 100k mortgage they assumed.  This is the part that will get reported on form 709 right?

For my capital gain/income tax purposes, it would be 150k (original cost) - 40k (appreciation)=110k

so I have gained 100k through getting ride of the loan but lost 110k in value so I have a net loss of (10k) even though I can not claim that loss on my tax return.  I won't have any gain so no tax to pay?  Where would I report this on turbo tax? and how would I do that?

Is that understanding correct?

[newuser9]

For the Fair Market value on form 709, would it not be okay to just use a higher value say instead of 250k I can do 260k or 270k.  Like I could find the highest value of the houses being sold around the area and use the highest rate instead. 

The life time exclusion is 12 million so it wouldn't really matter to me.  Would this strategy not work?

[newuser9]

Also for the part sale portion, how would I report this in turbo tax?

Should I report this on form 4797?  If so how do I not report a loss since my calculation shows a loss:

-150k original cost 

+40k depreciation

+100k loan that's pass to my parents.

net loss (10k)

[tagteam]

You cannot report any kind of a loss since you "sold" to a related party.

[newuser9]

I know that I can not claim a loss.  I am fine with that.

My question is do I still need to report it on my income tax return?  The part sale portion of the transaction?

If so how do I do that in Turbo Tax?

[tagteam]

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@newuser9 wrote:

The life time exclusion is 12 million so it wouldn't really matter to me.  Would this strategy not work?

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If you ever have to justify the valuation you used to the IRS, the only acceptable documentation (i.e., what they must accept) of that valuation would be an appraisal by a certified real estate appraiser.

[newuser9]

Thanks for the replies.

I was hoping that I could get away with doing an appraisal as that's at least another $500.  Thought if I used a really higher number for FMV they wouldn't complain.  Or maybe I could just accept what ever value they decide that house is worth.  There is no way that house is worth 12 mil.  If it did I sell it and retire.