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Foreign property gift

My mother lived in UK and was a British citizen.   A few years ago she was concerned that she would have to live in a care home, and in that case her home would have been sold by the government to pay her care fees.  Her lawyer persuaded her to sign the deed over to my name to prevent this (making it a gift to me).   I am a US citizen, and reside in USA.  My mother had a legal agreement drawn up which stated that she had a lifetime right of abode at the address and that I could not sell it or charge her rent.   The lawyers also retained the title deeds until her death.  They registered the name change with the land office but the security was retained by them and not discharged until after her death (not sure what that actually means).   

 

I am not sure about the gains tax.  Do I need to use the date of ownershio change, or the date I was legally able to take physical possesion and my right to sell?   This makes quiet a difference in the gains tax. I did see some other articles which said this situation could be treated as an inheritance instead of a gift?

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Accepted Solutions

Foreign property gift

I have found out the answer for this scenario.   

 

It should be entered as inheritance.   I will explain why below.

You enter the Aquisition date as date of death (not the date the property was transferred).   Enter the FMV (full market value) of the property at time of Aquisition, which is known as using the step-up basis rule.

 

You are probably thinking...how is this possible when the property was transferred at an earlier date, and so isn't that a gift?

 

Well,  its to do with property transfers with retained life estates and their implications on the gross estate.  This is Internal Revenue Code Section (I.R.C. §) 2036 which outlines the rules regarding property transfers where the decedent retains a beneficial interest lasting for the rest of their life.

 

Here are the key points:

  1. Definition: When a person transfers property as a gift (without adequate and full consideration in money or money’s worth) but retains a beneficial interest in that property for their lifetime, it falls under I.R.C. §2036.
  2. Inclusion in Gross Estate: The value of such property is included in the decedent’s gross estatefor estate tax purposes. In other words, even though the decedent legally no longer owns the property, it is still considered part of their estate.
  3. Examples:
    • The rule also applies to situations where the decedent retains benefits substantially akin to outright ownership, such as the right to physical use and enjoyment of the property or the right to designate another party who will ultimately receive outright ownership or income during the donor’s lifetime.

So, basically, if you have person who made the property transfer retains a life estate in the property (usually an agreement drawn up by the 2 parties by a lawyer which prohibits sale and completed gift until death) then this is then regarded as part of the GROSS ESTATE.  Now normally assets in the gross estate go through probate so debts can be paid and the will is administered.   However. a property with a life estate (while part of the gross estate) will skip the probate process and the bequest will be effective on date of death.  Therefore it's an inherited asset.   Maybe that's why you can't enter the FMV in the gift part of online s/w.  

 

That's my understanding...hope it helps.  

 

View solution in original post

7 Replies
Vanessa A
Expert Alumni

Foreign property gift

Did you sell the property?  If not, then there wouldn't be any gains on the property

 

If you did sell it, then the gift would not be considered complete until the day you had control over the house.  So, the day you gained control over the house is the day you would use for the FMV of the house.  

 

You will also need to determine your mothers basis in the house to determine what your actual gain is on the sale. 

 

 

If the FMV of the property at the time the donor made the gift is less than the donor's adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property.

  • Your adjusted basis for figuring a gain is the donor's adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
  • Your adjusted basis for figuring a loss is the FMV of the property at the time the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
  • Note: If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property. What is the basis of property received as a gift?

 

 

When a Gift is Not a Gift

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Foreign property gift

In 2016 She had the onwnership name change and legal rights documents (lifetime residence, no right for me to take physical possesion, or sell until her death)     

 

 My mother passed away in NOV 2022.   I was able to sell the property in July 2023.   I received the bank account finances (inheritance) around the same time.    

 

At the time she bought the house it was sold to her for 13,500 GBP.  

At the time of ownership name transfer it was valued at 58,000 GBP

At the time of sale it was valued at 50,000 GBL (price declined).  

 

I was told that I could enter this as an inheritance since I was not able to take possession until her death, is that not correct?

 

Foreign property gift

just an update on what I mentioned before.   

My mother purchased the property in 2005 for 13,500 GBP.

She transferred the property to my name in 2016. 

I had legal costs involved in 2016 for that so I assume I can deduct that legal cost at time of sale?

She passed away in NOV 2022, so that is when I had the right to take possession and sell it.   

I had it valued in DEC 2022, and it was 52,000 GBP.

It was finally sold in JULY 2023 for 52,000 GBP (minus legal and sales expenses).

 

If I understand what you're saying, the gift date would not be 2016, but would be considered as NOV 2022 when I took control.  And so the donors (my mothers) FMV of completed gift date would be 52,000.

 

maybe I misunderstand.

pk
Level 15
Level 15

Foreign property gift

@bryan62 , while agreeing with my colleague @Vanessa A , i have a slight  different nuance to the situation.

(a) I see this as a gift, with  a delayed/ restricted possession.  Thus it is effected  "only when permitted"  by the condition of her death.

(b) So the acquisition is by gift and no inheritance.

(c) However, since at the time the gift being  effective, the donor's basis  was stepped up to FMV  ( under US laws applicable  to you ),  your basis is FMV on the date of death i.e. when the "possession/gift" was effective.

 

Note that the my conclusion leads to operationally the same as that of my colleague except that I recognize that  this was a gift.

 

Does this make sense ?

 

Is there more I can do for you ?

 

pk

Foreign property gift

Thank you pk.  I had also been doing some further online research and found a similar argument to what you state.  Here is what I found...it sounds like I can use this clause then.  Would you agree?  Now I have to find out how to enter this in my tax s/w as it doesn;t allw gifts to use step up from what I see, and that's why I asked if I could enter it as inheritance to do that.

 

Internal Revenue Code §1014(a) allows for a STEP UP IN BASIS through making incomplete gifts.
If the home was transfetred to children while retaining a life estate: this gives the children the property with the basis being its FMV at the time of death.

 

Life Lease:
A life lease is a legal arrangement where an individual (the life tenant) retains the right to occupy a property for the duration of their life.
The life tenant has the right to use and enjoy the property during their lifetime, but they do not own it outright.
Upon the life tenant’s death, the property passes to another party (the remainderman), who typically receives full ownership.
Step-Up in Basis with Life Leases:
When the life tenant dies, the remainderman typically benefits from a step-up in basis for tax purposes.
This means that the remainderman takes ownership of the property at its fair market value at the time of the life tenant’s death.
By receiving a step-up in basis, the remainderman can potentially save on capital gains tax when they eventually sell the property.
Here’s how it works:
Suppose the original owner (life tenant) purchased the property many years ago, and its value has appreciated significantly.
If the remainderman were to inherit the property directly from the life tenant, their basis would be the original purchase price (which could result in substantial capital gains tax upon sale).
However, with the step-up in basis, the remainderman’s basis is reset to the fair market value at the time of the life tenant’s death. This minimizes potential capital gains tax liability.

 

 

pk
Level 15
Level 15

Foreign property gift

@bryan62  you should be able to  TurboTax that  acquisition  by gift has  "Donor's basis" of  UKL of XXXX.  Turbo should be asking you the basis  of the donor when you tell the  asset was acquired  by gift.

 

Are you using the desktop version  or on-line version ( I don't  know the on-line version at all )?  In  the desktop version you can always go the forms mode and enter the amount directly.

Foreign property gift

I have found out the answer for this scenario.   

 

It should be entered as inheritance.   I will explain why below.

You enter the Aquisition date as date of death (not the date the property was transferred).   Enter the FMV (full market value) of the property at time of Aquisition, which is known as using the step-up basis rule.

 

You are probably thinking...how is this possible when the property was transferred at an earlier date, and so isn't that a gift?

 

Well,  its to do with property transfers with retained life estates and their implications on the gross estate.  This is Internal Revenue Code Section (I.R.C. §) 2036 which outlines the rules regarding property transfers where the decedent retains a beneficial interest lasting for the rest of their life.

 

Here are the key points:

  1. Definition: When a person transfers property as a gift (without adequate and full consideration in money or money’s worth) but retains a beneficial interest in that property for their lifetime, it falls under I.R.C. §2036.
  2. Inclusion in Gross Estate: The value of such property is included in the decedent’s gross estatefor estate tax purposes. In other words, even though the decedent legally no longer owns the property, it is still considered part of their estate.
  3. Examples:
    • The rule also applies to situations where the decedent retains benefits substantially akin to outright ownership, such as the right to physical use and enjoyment of the property or the right to designate another party who will ultimately receive outright ownership or income during the donor’s lifetime.

So, basically, if you have person who made the property transfer retains a life estate in the property (usually an agreement drawn up by the 2 parties by a lawyer which prohibits sale and completed gift until death) then this is then regarded as part of the GROSS ESTATE.  Now normally assets in the gross estate go through probate so debts can be paid and the will is administered.   However. a property with a life estate (while part of the gross estate) will skip the probate process and the bequest will be effective on date of death.  Therefore it's an inherited asset.   Maybe that's why you can't enter the FMV in the gift part of online s/w.  

 

That's my understanding...hope it helps.  

 

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