topic Re: Retroactive Gift Tax Filing to Decrease Capital Gains in Get your taxes done using TurboTax

Retroactive Gift Tax Filing to Decrease Capital Gains

hcjontax — Fri, 13 Nov 2020 00:48:12 GMT

Hi,

My dad had a property he bought in 1992 for $120K. He transferred the deed to my brother in 2018 for $1. He did not file a form 709 gift tax return. Our family is about to sell the property for $320K in 2020

However, my mom has -$200K in capital loss for 2020. Can we transfer the deed from my brother to her name, so we can apply the -$200K capital loss to the $200K capital gain from the property sale?

I believe the IRS would want us to substantiate the $120K cost basis for the property being sold, so we would have to show the initial $120K deed transfer from my dad in 1992, and then would we have to retroactively file a form 709 for my dad to my brother, and another form 709 from my brother to my mom?

Just want to make sure I am not doing anything illegal or anything that would trigger an audit. I believe everything I am doing is legitimate, and there are no laws against transferring assets to another person to apply capital losses to capital gains but want to ask an expert before I transfer the deed.

Thank You!

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

macuser_22 — Fri, 13 Nov 2020 00:41:52 GMT

There are MANY aspects to your post that require detailed explanation before it can be answered. I highly suggest that you seek a tax professional that deals with gifts and property transfer.

Failure to timely file a 709 can lead to stiff penalties (on the giver) that possibly can be abated with proper explanation. There are also questions about the title and if (transfer for $1) is actually a gift of the property (title) or a gift of the equity (money) - which it is can have big tax consequences.

You should take all documentation, titles, agreements, etc; to the professional for evaluation.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

hcjontax — Fri, 13 Nov 2020 00:46:59 GMT

Thanks - I researched the tax penalty and found if you don't owe a gift tax, there is no penalty for filing late gift tax return. Also, the lifetime gift exemption is $11.68mm, of which my family is far below $1mm.

The transfer should be a gift of property (title) as the lawyer I am meeting with tomorrow is transferring the deed/title to my mother. Nothing was mentioned about the equity.

Let me know if you disagree.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

macuser_22 — Fri, 13 Nov 2020 01:10:16 GMT

That is not quite right - if no tax or penalty then why would anyone ever file a 709 form if they have nowhere near $11 million assets.

The purpose of the 709 is to apply the gift to your lifetime exemption. Failing to file the 709 makes the gift taxable. Filing late imposes a penalty (not the tax) of 5% (up to 25%) of the unpaid tax each month that it is late.

See this article that explains it better then the 709 instructions do.

https://finance.zacks.com/dont-file-gift-tax-return-8338.html

The difference is, if the property was a gift then it retains the cost basis of the giver, if it was actually a sale (even for $1) then the cost basis is the buyers cost (not $1, but the assessed value of the property on the date of sale.) Property sold for minimum cash amounts should have had an appraisal to determine the actual value (for tax purposes) when it was sold.

That is a question for your attorney.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

hcjontax — Fri, 13 Nov 2020 01:46:50 GMT

Thanks for the reply. So the lifetime exemption of $11.68mm has not been breached, so if I filed a form 709, there would be no tax due at all. But I never filed a form 709.

I read the article you sent and found this statement:

"If you fail to file the gift tax return, you’ll be assessed a gift tax penalty of 5 percent per month of the tax due, up to a limit of 25 percent. If your filing is more than 60 days late (including an extension), you’ll face a minimum additional tax of at least $205 or 100 percent of the tax due, whichever is less.

So there is no tax due to begin with on the gift as it is below $11.68mm, so they will penalize me 5% of $0 in taxes due which is $0? If I file 2 years after the transfer, I will face a minimum of $205 or 100% of tax due (100% of $0), which ever is less so again I will have to pay $0?

I also found this post which also states that no penalty/tax is due for late filing of form 709, if there was no gift tax due to begin with.

https://ttlc.intuit.com/community/taxes/discussion/re-can-a-late-gift-tax-return-for-previous-years-be-filed-without-penalty-when-no-gift-tax-is-owed/01/848854

It was not a sale as there was no broker, sales agreement involved, and was only a transfer of the deed. It would be hard to argue that it was sale, and there was not capital loss/gain recorded from the transfer from either party.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

macuser_22 — Fri, 13 Nov 2020 02:11:11 GMT

If that were true then nobody would ever file a 709 file. It only applies to the $11 million exemption *if* the 709 is filed. Without the 709 the $11 million exemption does not apply and the tax is due. Ask your attorney.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

Anonymous — Fri, 13 Nov 2020 02:19:25 GMT

assuming the title is transferred to mom, who is going to get and keep the money from the sale? it better be mom. if she after the sale transfers the cash to your brother, even if she files a gift tax return, the IRS could and would argue that the sale was your brother's. the IRS has had great success in arguing that certain transactions are shams and should be disregarded for tax purposes.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

Anonymous_ — Fri, 13 Nov 2020 02:20:40 GMT

@macuser_22 wrote:

...Without the 709 the $11 million exemption does not apply and the tax is due.

@macuser_22

Do you have any authority for the proposition stated (in the above quote)?

Treas. Reg. §25.6019-1(f) requires that a gift tax return be filed even if there is no tax due, but I cannot find any authority for the proposition that failing to file a gift tax return serves to eliminate the applicable exclusion amount.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

macuser_22 — Fri, 13 Nov 2020 02:28:23 GMT

@Anonymous_ wrote:

@macuser_22 wrote:

...Without the 709 the $11 million exemption does not apply and the tax is due.

@macuser_22

Do you have any authority for the proposition stated (in the above quote)?

Treas. Reg. §25.6019-1(f) requires that a gift tax return be filed even if there is no tax due, but I cannot find any authority for the proposition that failing to file a gift tax return serves to eliminate the applicable exclusion amount.

Are you saying that there is no possible penalty for failing to file a 709?

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

Anonymous_ — Fri, 13 Nov 2020 02:32:38 GMT

@macuser_22 wrote:
Are you saying that there is no penalty for failing to file a 709?

Yes, where there is no tax due and with the possible exception of a general failure to file a required return penalty (which is typically a fixed amount and usually relatively minimal).

If you can locate anything in the Code or Regs that states otherwise, I would appreciate a cite thereto.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

macuser_22 — Fri, 13 Nov 2020 02:45:10 GMT

Then what is the point of *anyone* with less then $11 million in assets to ever file a 709? AFAIK the 709 is the form that *applies* the exemption, without it then there is not exemption. I believe other code sections actually apply the tax (§2500-2501 possibly).

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

hcjontax — Fri, 13 Nov 2020 03:09:07 GMT

The cash would be deposited into a joint account under her and my name. And then majority would be put into an investment account under her name, while rest used to pay off any other debts.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

Anonymous_ — Fri, 13 Nov 2020 03:09:23 GMT

@macuser_22 wrote:

Then what is the point of *anyone* with less then $11 million in assets to ever file a 709? AFAIK the 709 is the form that *applies* the exemption, without it then there is not exemption. I believe other code sections actually apply the tax (§2500-2501 possibly).

A 709 is required to be filed regardless of whether or not tax is due; that is clearly in the Regs (see the cite in my previous post).

Regardless, it is the Code and the Regs that apply the exemption, not the form. I have also read the relevant sections of the Code and Regs and cannot find anything that abrogates the exclusion as a penalty for failing to file Form 709.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

hcjontax — Fri, 13 Nov 2020 03:13:41 GMT

One reason for someone with below $11mm limit to file a 709, is to show a higher cost basis for a property that was gifted, so that when it is sold, the capital gains tax is lower for the person they gifted it to.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

macuser_22 — Fri, 13 Nov 2020 03:15:35 GMT

@Anonymous_ wrote:

@macuser_22 wrote:

Then what is the point of *anyone* with less then $11 million in assets to ever file a 709? AFAIK the 709 is the form that *applies* the exemption, without it then there is not exemption. I believe other code sections actually apply the tax (§2500-2501 possibly).

A 709 is required to be filed regardless of whether or not tax is due; that is clearly in the Regs (see the cite in my previous post).

Agreed, but if *required* to be filed then what is the penalty for not filing it if I am incorrect? There is clearly a penalty for not filing it, but what is it if it does not exist?

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

macuser_22 — Fri, 13 Nov 2020 03:22:01 GMT

@hcjontax wrote:

One reason for someone with below $11mm limit to file a 709, is to show a higher cost basis for a property that was gifted, so that when it is sold, the capital gains tax is lower for the person they gifted it to.

You have that backwards and it has nothing whatsoever to do with a 709 (a 709 only applies to the giver of a gift - never to the receiver). A gifted property does *not* have a higher cost basis. A gift retains the cost basis of the giver. Property that are sold have the cost basis of the buyer. (Which goes back to my prior comments).

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

macuser_22 — Fri, 13 Nov 2020 03:30:06 GMT

@macuser_22 wrote:

@hcjontax wrote:

One reason for someone with below $11mm limit to file a 709, is to show a higher cost basis for a property that was gifted, so that when it is sold, the capital gains tax is lower for the person they gifted it to.

@macuser_22 wrote:

@hcjontax wrote:

One reason for someone with below $11mm limit to file a 709, is to show a higher cost basis for a property that was gifted, so that when it is sold, the capital gains tax is lower for the person they gifted it to.

You have that backwards and it has nothing whatsoever to do with a 709 (a 709 only applies to the giver of a gift - never to the receiver). A gifted property does *not* have a higher cost basis. A gift retains the cost basis of the giver. Property that are sold have the cost basis of the buyer. (Which goes back to my prior comments).

As an example, suppose a property was acquired in 1950 for $10,000 and today is is worth $1,000,000, As a gift the receiver of the gift has a gain of $990,-000. But if the property was was sold to the other person (the receiver) in 2018 when the property was worth $800,000 then the receiver would only have a gain of $200,000.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

Anonymous_ — Fri, 13 Nov 2020 03:34:45 GMT

@macuser_22 wrote:
Agreed, but if *required* to be filed then what is the penalty for not filing it if I am incorrect? There is clearly a penalty for not filing it, but what is it if it does not exist?

If there is no tax due, then probably nothing (but I believe there is a general failure to file penalty somewhere in §§7201-7217).

Again, if you cannot find a specific penalty in the Code or Regs, then it simply does not exist; a penalty cannot merely be assessed because it seems correct to do so or it would otherwise be illogical not to apply a penalty.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

macuser_22 — Fri, 13 Nov 2020 03:41:44 GMT

@Anonymous_ wrote:

@macuser_22 wrote:
Agreed, but if *required* to be filed then what is the penalty for not filing it if I am incorrect? There is clearly a penalty for not filing it, but what is it if it does not exist?

If there is no tax due, then probably nothing (but I believe there is a general failure to file penalty somewhere in §§7201-7217).

Again, if you cannot find a specific penalty in the Code or Regs, then it simply does not exist; a penalty cannot merely be assessed because it seems correct to do so or it would otherwise be illogical not to apply a penalty.

Why is there zero tax due? -- only because the $11 million exemption makes it so. How does one get the gift applied to the exemption? - only one way - by filing a 709 form. Agreed, that filing late 709 means that there will be zero tax due, but there is a penalty due based on what the tax would have been had the 709 never been filed. What is due is the *penalty*, not the tax. However, the IRS will accept almost any reasonable explanation why the 709 was not timely filed and forgive the penalty.

Re: Retroactive Gift Tax Filing to Decrease Capital Gains

Anonymous_ — Fri, 13 Nov 2020 05:03:49 GMT

@macuser_22 wrote:
Why is there zero tax due? -- only because the $11 million exemption makes it so. How does one get the gift applied to the exemption? - only one way - by filing a 709 form.

The exemption is provided for in Section 2505 of the Code and its applicability has nothing to do with the filing of Form 709. If it were otherwise, that would be spelled out in the Code or Regs and it is not.