Tax on giving rental property as a gift

[Frazerdl]

How do pay the taxes on the depreciation? I was told when the gift (property) was sold by my kids I would have to pay taxes on the depreciated amount. But I cannot figure what form to file.

[Critter-3]

YOU don't pay taxes on a property you don't own any longer ... the new owners must start the depreciation all over again using your adjusted basis that they got with the gifted property ... please seek local professional assistance with this matter since it is not a common event. 

[Opus 17]

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@Frazerdl wrote:

How do pay the taxes on the depreciation? I was told when the gift (property) was sold by my kids I would have to pay taxes on the depreciated amount. But I cannot figure what form to file.

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Your children must recapture all the depreciation you claimed or could have claimed plus all the depreciation they claimed or could have claimed.  They will likely need copies of your tax information.  Remember that the tax code assumes all income is taxable unless you prove otherwise.  If your children can't prove the amount of depreciation you previously claimed, an auditor will likely conclude the property was fully depreciated so the entire amount is taxable.  You do need to see an accountant. 

[josephbenedict]

Would the answers on recaptured depreciation change if the donor was unable to deduct the depreciation, i.e. donor's income exceeded the $150,000 income threshold for claiming rental expenses?

[Critter-3]

@josephbenedict 

The passive loss carryover continues to the new owner ... please seek local professional assistance in this matter so it gets reported correctly on both returns. 

[Opus 17]

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@josephbenedict wrote:

Would the answers on recaptured depreciation change if the donor was unable to deduct the depreciation, i.e. donor's income exceeded the $150,000 income threshold for claiming rental expenses?

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Everything carries over to the recipient of the gift; basis, depreciation, passive loss adjustments, etc. 

[AmeliesUncle]

No, the Passive Loss Carryover does NOT get transferred to the gift recipient.  Instead, the Basis of the property is increased by the amount of the Passive Loss Carryover.

[Anonymous_]

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@AmeliesUncle wrote:

No, the Passive Loss Carryover does NOT get transferred to the gift recipient.  Instead, the Basis of the property is increased by the amount of the Passive Loss Carryover.

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Per Section 469(j)(6)(A)

[kaih23]

What if I transfer the rental property to my child and they live in it. The rule of living in it for 2 or more years should apply and there would be no capital gains taxes paid upon sale of the property but still need to pay depreciation taxes?

For example:

Home fully depreciated at $200k (depreciate more than initial cost due to start date of rental and start value at time was $200k)

Initial cost of home: $150k

value when gifted to child: $400k

Child lives there for 5 years and sells it for $500k

So, the child needs to pay the $200k depreciation taxes (passive income tax rate) but does not need to pay the $350k capital gains tax. Is this correct?

[Anonymous_]

@kaih23 

Virtually all attributes from your ownership would carry over to your child if you were to gift the property to your child, including the accumulated depreciation (which is recaptured at a maximum tax rate of 25%).

[Opus 17]

@kaih23 

you need to get professional advice. You depreciated the property incorrectly. When you placed the property and service as a rental, your bases for depreciation was your original cost or the fair market value at the time, whichever was lower.  

Adding to that problem is your desire in transferring the property and realizing the gain with the least amount of tax.  You would not want to put yourself in a position where, for example, the IRS could accuse you and your child of engaging in a sham transaction to avoid tax, and auditing both of you and assessing the full amount of tax that you would have paid if you had just sold the property yourself.

[Anonymous_]

@kaih23's post was edited (to add the hypothetical) after I posted my response.

Regardless, clearly the wrong basis was used for depreciation and, at this juncture, @kaih23 should absolutely seek professional tax guidance as well as a consultation with an estate planning professional.

[ranjisrini]

We had a rental property for the last ten years. We reported the income. Last year 2021 we gave the house to my son rent-free. The fair market rental is $ 30,000. Treating this as a gift my wife and I are not reporting any rental income this year for tax 202. We are also not taking any depreciation. Is this correct?

[PatriciaV]

@ranjisrini

Yes, if the property was not rented at all in 2021, you would not report any rental activity (including income, expenses, and depreciation) for that property. In TurboTax, be sure to check the boxes for "...not rented all year" and "I did not rent..." under "Was This Property Rented for All of 2021?" during the Property Profile section of this rental property.

[Greg96]

I have a situation where I bought a home for my in law parents , they paid rent whenever they could and in 2019 and 2020 I treated as an investment property and deducted expense and depreciation. The rent was below market value. In 2021, we charged them no rent. Because of this we do not qualify for a 1031 exchange to apply to a new home for them when we sell this home. I'm looking at a long term capital gains tax 15% on the increased property value.  If I gift the house to them, and we sell shortly thereafter, its also 15% due to short term gains tax. 

Looks like I should have gifted the house to them up front and with their low income they would have paid 0% long term capital gains tax.  Are there any other ways to avoid this 15% tax?