Son and Granddaughter Had Rent Free Use Home. Now Selling.

[JohnASmith]

9 years ago I purchased a home for my son and granddaughter to use rent free.  The amount of forgiven rent was well below gift tax exclusion.  Now I am selling the house and trying to figure what my basis is for any taxable gain.  Am I allowed to include 9 years of expenses, such as property taxes, insurance, association dues etc?  These are costs I would have incurred even if the property had not been occupied.  My son paid for things like, upkeep, utilities and renters insurance.  No lectures please, this situation was absolutely necessary.  Thank you in advance. 

[DavidD66]

Your cost basis is what you paid for the house, plus the costs of any improvements you made.  You cannot increase your basis for the expenses you paid, including property tax, insurance, association dues, etc.  

[Carl]

9 years ago I purchased a home for my son and granddaughter to use rent free. The amount of forgiven rent was well below gift tax exclusion.

I know it's not what you want to hear. Also, I'm not lecturing here. Just including details which I'm sure you already know, so that others reading this thread in this public forum may find it helpful.

There is no "forgiven rent", as for you this was just a 2nd home that you allowed your son and grand daughter to live in. Also, there's no business use of this property what-so-ever that I can see, since you clearly state, "9 years ago I purchased a home for my son and granddaughter to use rent free." 

Therefore upon selling, your cost basis is what you paid for it originally, plus the cost of any property improvements you may have paid for during the time you owned it. That's pretty much it. You also do not qualify for any capital gains tax exclusion on the sale if sold at a gain, since the property was never your primary residence. Additionally, if sold at a loss, due to tax law changes that when into effect in 2018, losses on the sale of personal property are not deductible unfortunately.

Am I allowed to include 9 years of expenses, such as property taxes, insurance, association dues etc?

Nope. Property taxes are claimed in the tax year they are paid. For you this would have been a SCH A itemized deduction and most likely would not have made any difference in your tax liability anyway. Remember, your SCH A itemized deductions must exceed your standard deduction before they are of any help in reducing your tax liability.

The property insurance and association dues are not deductible for personal use property and never have been.

My son paid for things like, upkeep, utilities and renters insurance.

Unfortunately, none of that is deductible or reportable on any tax return. It's considered the routine cost of maintaining one's residence. (Smart on his part too, to get the renter's insurance!)

[Hal_Al]

As other have said, you coulda deducted the property tax and mortgage interest on Schedule A (itemized deductions). If you failed to do so (and had enough total deductions to itemize), you could file amended returns for the last 3 years to do so. An amended 2019 return has a 3-15-23 filing deadline. 

[JohnASmith]

Just to clarify, this was never my residence, it was an investment property.  These were necessary costs to keep the investment.

[Hal_Al]

You may have  initially purchased it as an investment property.  But since it was being used by family, for tax purposes, it was a 2nd home.  You had "personal use". 

Real estate taxes are deductible on all property. Mortgage interest is deducting on two homes.

If it really was investment property, you would have been allowed to "capitalize carrying costs" (like insurance and HOA fees, maintenance) and add them to your cost basis.  But to do so, you had to file that election with your tax return each year. The election is made with the tax return by its due date, by attaching a statement. You cannot wait until you sell the property, but must make that election each year. 

[JohnASmith]

Got it. thank you.  

[JohnASmith]

I'm actually selling it to the son I mentioned, at a steep discount, actually what I paid for it 9 years ago. Seems that's also my cost basis so the difference between that, and fair market value, will be treated as a gift, subject to gift tax rules.  I think I have that part figured out.  I was hoping I could get it below $64,000 so I wouldn't need to report it.  My wife and I are titled now. We are doing a family transfer to my son and his wife.  So, $64,000 exempt and about $50,000 pushed to our lifetime estate exemption.  We're not wealthy so that part is irrelevant.  I just didn't want to bother with it.  If you think I overlooked something please let me know. 

[tagteam]

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@JohnASmith wrote:

We are doing a family transfer to my son and his wife.  So, $64,000 exempt and about $50,000 pushed to our lifetime estate exemption. 

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For the 2023 tax year, the annual gift tax exclusion is $17,000 per individual. 

Therefore, if it is you and your wife gifting to your son and his wife, the 2023 exclusion would be $68,000.

[JohnASmith]

Thanks everyone, you got me on track.  I will have to report it as a gift and use it against my future estate tax exemption.  Market value less original cost = gift amount.  😊

[tagteam]

The fair market value is the figure you would report on Form 709 as the amount of the gift.

[JohnASmith]

Sorry, I meant to say, the market value less the price my son is paying = gift amount. Too many numbers running around in my head. 🙄

[JohnASmith]

Hopefully it is okay to ask a couple more questions on the same issue:

1:  Assuming my son pays the same as my basis for the house, meaning no gain for me,  is the Form 709 all I need to file?  Or, do I still have to file a Form 8949 showing no gain, or loss?

2:  When determining actual cash value, can I determine that myself based on comps?  Once that number is established can I deduct from that value what it would have cost to sell the home and needed repairs?   

[MarilynG1]

Since the home was not a Rental Property (reported as such), you may have a personal loss on the sale of your second home, which is not deductible.  

Just the gift reporting. 

Here's How to Report the Sale of a Second Home. 

Edited 2/3/2023 | 5:03 pm

[tagteam]

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@JohnASmith wrote:

1:  Assuming my son pays the same as my basis for the house, meaning no gain for me,  is the Form 709 all I need to file?  Or, do I still have to file a Form 8949 showing no gain, or loss?

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You may not have a gain, but you will most likely have to file an 8949 (and Schedule D) for that part of the transaction that is a sale.

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@JohnASmith wrote:

2:  When determining actual cash value, can I determine that myself based on comps?  

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You can use comps but be advised that the IRS is only required to accept an appraisal from a certified real estate appraiser as evidence of the fair market value at the time of the gift.