Tax on giving rental property as a gift

[i_2020]

I browsed but didn't find answer to my specifics.
My mother lived in her own home. She also had one rental property that she bought for $100K many years ago. Last year, she gave the rental property to me. It was appraised at $180K last year. Now is that tax time :( Since Turbotax does not support form 709 for gift tax report so I read and read as much information on line as possible. I understand that as donor my mother needs to file form 709 and pays zero tax because of the $5.45M gift limit. That 709 form is not too hard to do by hand in this case.
My mother also claimed depreciation on the rental property during the years under her ownership. My questions are:
Does my mother have to pay tax on the $80K profit/capital gain ($180-$100K)?
Does all the depreciation now work back in her 2016 tax return to pay more tax?
Thanks for your help.

[view2]

Generally,The rule governing the basis of gifted assets is commonly referred to as the carry-over basis rule.

Generally, property received as a gift are calculated with respect to the original owner's cost basis in the property. In other words, when property is given, the recipient receives both the property and the property's cost basis.

Any gift of depreciated property will trigger the so-called dual basis rules under Section 1015(a). 

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."

http://taxmap.ntis.gov/taxmap/faqs/faq_10-001.htm

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.

When the property is transferred as a gift, while the previous owner is still alive, the previous owner's original basis is transferred to the new owner, who must apply the original basis when calculating the capital gains tax realized upon the new owner's eventual sale of the property.

Under federal gift tax rules, the recipient of a gift takes the donor's tax basis. So your capital gains tax basis will be whatever your mother's tax basis was immediately prior to the gift.

[drdoman]

I am not clear.   You answered about the impacts to the receiver of the property but did not answer about the mother (the giver of the property).  Does the giver/gifter have any tax liability?  I know she has to fill out the form 709 but how does she show the gift of the rental property and on what form on this year's taxes?  If it were a sale she would recoup the depreciation as "income" but how does she handle the depreciation when the house is a gift?  Is it a "sale" at $0? Is the depreciation she already took considered taxable?

[TaxGuyBill]

The giver doesn't report anything on their tax return.  The giver just stops the depreciation on the assets on the date of the Gift, and that is usually all there is (for non-residential property, recapture of Section 179 could come into play).

[drdoman]

I was asking about the rental property in the original question and not the property she lived in.  Does that change your answer any?

[TaxGuyBill]

No, the answer it the same.  The depreciation stops for the rental property, but nothing else is reported on the income tax return.

[drdoman]

thanks!!!   I was wondering if just stopping it would be a red flag of some sort to the IRS as to what was done to the rental property when gifted

[TaxGuyBill]

Nope, there shouldn't be any 'red flags'.

[sureshpendap]

Does the answer change if the property gifted is outside USA?  In this case the person gifted the property is a USA tax payer and the person receiving the gift is foreign country tax payer

[dbtaxsolutions]

if the rental property cost base is 100k in 2015 for example and was gifted in 2018, when filling out 709 gift form, do you put 100k gift value or market value of rental property as of 2018?

[maheshvk1]

Hello,

I just found this thread.  I have a question - what happens to depreciation recapture?  Is that not reported on the Gift Donor's tax return for the year he/she gives the rental property as gift? Or does the accumulated depreciation goes with the property to the new owner who has to report it when they sell the property? Thank you for answering this specific question.

[ColeenD3]

@maheshvk1

As stated above, the basis of the gifter is transferred to the giftee. This includes the depreciation.

"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."

[tjc042]

I purchased my house in 1992 for 52K and lived there until 2008. It was paid off in 1998 so there was no mortgage on it. In 2008, I moved in with my son at his house and rented my main house (the subject property) off and on until last year. In 2019, I transferred the deed into my sons name as a gift for $1. The current value of the property is probably 100k. What is my tax liability if any? Do I need to file form 709? Can you confirm whether TT supports this form?

[Carl]

Here are specific answers to your specific questions, without going around your elbow to get to your thumb. 🙂

I understand that as donor my mother needs to file form 709 and pays zero tax because of the $5.45M gift limit. That 709 form is not too hard to do by hand in this case.

That is correct. The value of the gift she is giving you will be subtracted from her lifetime allowance of $5.45M that can be transferred to you with no tax consequences on her.

My mother also claimed depreciation on the rental property during the years under her ownership. My questions are:
Does my mother have to pay tax on the $80K profit/capital gain ($180-$100K)?

What capital gain? I think you are referring to the depreciation your mother has already taken on the property. The answer to your question is no, she does not recapture that depreciation or pay taxes on. You are the one as the recipient of the gift, that will pay taxes on it in the year you sell the property. When your mom gifted to the property, she gifted you everything associated with that property, to include all prior year's depreciation she has already taken.

Does all the depreciation now work back in her 2016 tax return to pay more tax?

Bottom line is, you are the one who will pay tax on that depreciation arleady taken. But you will not pay it until the tax year you sell the property. There are two ways to handle this is "your" tax return.

1) your mother gifts you her original cost basis in the property along with all the prior depreciation. Your cost basis on the property will be her cost basis *MINUS* all the depreication your mom took on the property while she owned it. This means your "in service" date will be one day after your mom reported it as given to you, and for "YOU" depreication starts all over for the next 27.5 years depreciation the new lower cost basis for you over the next 27.5 years.

2) Your mother gifts you her original cost basis int he property along with all prior depreciation. Your cost basis is "EXACTLY" the same has hers, your in-service date is EXACTLY the same as hers, and your prior depreciation already taken is EXACTLY the same as hers.

Overall, I highly recommend you select option 1) above.

-----------------------------

For your mom on her tax return, she needs to work through each individual asset one at a time and select the option for "I stopped using this asset in 2019". Then on the "Special Handling Required?" Screen she *must* select YES. If she selects NO then she will be asked for sales information, and the fact is she didn't sell anything.

Your mother will be entering a specific "date of disposition" for each asset, and that date should be the same for all assets.

If you elect option 1) above, then your date of acquisition/in-service must be one day "AFTER" your mom's date of disposition.

[LRIOS01]

So, does the donor report Form 709 or not?