Parents gifted me a rental property. Turbo tax asked me to know the fair value of the property but then I was not asked to input it. Does it need to go somewhere?

[Carl]

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. 

[darren5v1]

again...thank you

[tagteam]

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.

See https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/prope...

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).

[darren5v1]

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

[Carl]

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.

[tagteam]

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@darren5v1 wrote:

thanks for that update tagteam. I see, so I can use Zillow to determine FMV?

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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.

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@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?

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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.

[darren5v1]

thank you

[darren5v1]

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 

[Carl]

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.

[darren5v1]

thank!  Won't do that then. So I have to actually live in it for 2 years then...gotcha. 

[darren5v1]

Hi,

Had a follow up question for you.

Background 

I am having a house gifted to me that was part of 1031 exchange that parents already rented for 2 years after the exchange. You mentioned I have to have as primary residence for 2 years before I can avoid 250K of capital gains (not depreciation).

Question

I read the below online. Does this apply to me as I was planning on renting out for a couple years, then living for 2 years, then selling....?

"If you rent your property first, then move in and declare it as your personal residence, the Housing Assistance Act of 2008 dictates how much you'll have to pay in capital gains if you eventually sell it. This involves a little math. You must divide the number of years you rented the residence by the number of years you owned it. If you owned the house for five years and rented it out for the first three, this means you treated it as an investment 60 percent of the time. Therefore, you're limited to an exclusion equal to 40 percent of your profit, or the percentage of time you treated the property as your primary residence. For example, if you realize a $200,000 capital gain, instead of being able to exclude the entire amount from capital gains tax, you can exclude only 40 percent or $80,000."

[Carl]

Yes, it applies to you. For a situation where it was a rental and then became the primary residence prior to the sale, reporting the sale in TurboTax is a bit tricky, but absolutely doable. You just can't report the sale in the rental section of the program is all, and it "will" require some manual math on your part. The sale would get reported in the "sale of business property" section.

[tagteam]

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@darren5v1 wrote:

Does this apply to me as I was planning on renting out for a couple years, then living for 2 years, then selling....?

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Yes, it would be applicable to you in the situation you outlined; you would have a period of non-qualified use after 12/31/2008 per Section 121(b)(5). The program will make the calculation for you, however (see screenshot).

[darren5v1]

thanks again guys,

Your advice has proved very valuable and I am very appreciative of you spending your time to provide it. That seems like a pretty big hit. Correct me if I am wrong but it seems like if the cost basis was 50K in 1975 and we correctly carried it forward and I sold it for 300K (250K capital gains)

If I rented it for one year and lived in for two, I would lose 33% or 82K in gain and pay roughly 20K in taxes for that 1 year decision. If that was true it might be smarter to leave empty and keep as primary residence for 2 years if I was not living in it?

Darren

[Carl]

it might be smarter to leave empty and keep as primary residence for 2 years if I was not living in it?

Your train of thought is flawed. If you "leave it empty" then it's not your primary residence. You can only have one primary residence at a time. If empty and you're not physically living in it, then it's not your *primary* residence.