Do I have to pay capital gain taxes based on fair market value when gifting a rental house to a relative?

[J_Robles]

Bought rental for $260k in 2013, put $40k in remodeling/repairs.  Appraisal came at $382k recently.  I'll do a quitclaim deed for $0 and, so far, I have about $45,000 in claimed deductions of this rental.

[TomYoung · Accepted solution]

No, you won't have to pay capital gains tax when gifting this property, though gifting property to relatives - particularly rental property - frequently not the best thing to do from the standpoint of taxes.

You will need to file a gift tax return, (Form 709), as the gift exceeds the annual gift tax exclusion of $14,000 per year.  However you almost certainly will not pay any gift taxes as the value of the gift is well below the current lifetime exclusion of $10.98 million for a married couple.

One problem with gifting property is that the donor's basis carries over to the recipient while inheriting property means that the recipient's basis becomes the property's full fair market value.  So while the $382K current value is relevant for gift taxes it's irrelevant to the recipient's own income tax situation.  Depending on the circumstances it could be worthwhile to consult with a local CPA to weigh the pros and cons of gifting the property.

Tom Young

[Zbucklyo]

The federal lifetime exclusion is not $10.98 million; it is $5.49 million per person in 2017.  Some states have lower exclusion.

[J_Robles]

Thanks very much Tom.

So, where do I enter this in Turbo Tax?   Is it done by going to  BUSINESS / Sale of Business Property / Sales of business or rental property that you haven’t reported // Total Sales Price = $0

My brother will live in the house for more than 2 years before selling, so he may be able to avoid capital gain taxes.

[TaxGuyBill]

You need to go through the "asset" section in the Rental section.  When you edit the "asset" that you have been depreciating, you can say you converted it to personal use.

Your brother will still need to pay tax on the depreciation that you took.  That can not be excluded by the $250,000/$500,000 exclusion.


TurboTax does not prepare Gift Tax returns (which is completely separate from your personal income tax return), so you will need to prepare that manually or go to a tax professional.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/f709.pdf">https://www.irs.gov/pub/irs-pdf/f709.pdf</a>
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i709.pdf">https://www.irs.gov/pub/irs-pdf/i709.pdf</a>
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[J_Robles]

Thanks a lot.
Can I be the one paying the accumulated depreciation that I've taken, instead of the new owner of the rental house?  I prefer paying for depreciation, If that option is available.

[TaxGuyBill]

Not if you sell/gift it for $0.

Why are you concerned about that?  When your relative eventually sells it, they will be receiving about $400,000.  So having them pay the $12,000-ish in taxes shouldn't be a big deal.  If you really want to, you can give them some cash for $12,000-ish when it is sold.


Let's take a step back a second:  Is there a mortgage on this home?  If so, that will significantly complicate this transaction.  If there is a mortgage, what will be done with it once the relative receives the home?

As Tom said, there can be a lot of things to consider for a transaction like this, so a tax professional would be a good idea BEFORE you do any transferring of ownership.   For example, what is the purpose of this Gift?

[J_Robles]

No mortgage by now,  I payed off using a line of credit.  I owe more than 200k to him from old debts.
I guess then it's fine if he pays depreciation I took when he sells it.
But, for instance, if he sells in 10 years, how does the IRS know then what depreciation I took so far.  Is there a form for accumulated depreciation I (or he) need to submit?

[TaxGuyBill]

If this transaction is going to pay off the debt you owe him, you are actually selling it for $200,000+.

Again, you really should go to a tax professional to examine this entire transaction and help with with reporting it.

[J_Robles]

Thanks a lot Bill.  I guess I have to go find a professional.

[J_Robles]

For example, I may "sell" it for $280k.  Considering that no money will really change hands, could I still use a quitclaim deed to sell it for $280k.  Or does money needs to show up somewhere in a bank to bank transaction for it to be called sale?
Thanks again

[TomYoung]

Please, hie yourself to a tax pro.  

If the intent is to settle your debt then the transaction boils down to a sale of the property for the "more than 200k" and a gift of some amount like ($382K - "more than 200k").  I have no idea why you think this is a good maneuver.  Seems like you're leaving something like ($382K - "more than 200k") on the table as a gift, and maybe that fits into your grand plan somehow, but an online discussion the the TTAX just doesn't lend itself to much nuance or a comprehensive discussion of all the details.