Gifting away rental property with a mortgage

[newuser9]

I am trying to gift a rental property to my parents. The property still has a mortgage on it but the bank will allow them to assume the loan.

So would this be consider part gift part sale? If part sale which portion am I selling to my parents? Say if my loan is 100k then would the price of the house be considered sold for 100k?  

The property was purchased for 150k and now its worth 250k.  I took about 40k of depreciation. So if my parents assumed the loan of 100k.  Wouldn't I have a net loss?  I know I can't claim loss on this but just want to make sure there isn't any taxable gain either.

Original Cost 150k - Depreciation 40k - Loan 100k (Sale portion)=(10k) net loss?  So does that mean I won't have any capital gains on this transfer?

Is my calculations above correct or at least in the ball park?

I know I need to report the gift part on form 709 which turbo tax doesn't support but how do I report the sale portion of the transaction in turbo tax?

Also for Form 709, what kind of supporting document I need for the Adequate Disclosure requirement?

As for the Fair Market Value, do I need a certified appraisal? or could I find recently sold houses around that area and get an average to use as the FMV?

[tagteam · Accepted solution]

You should definitely reach out to a CPA or other tax professional, but one with experience in estate, trust, and/or gift tax issues.

See https://taxexperts.naea.org/listing/service/estates-gifts-trusts

[Mike9241]

definitely reach out to a professional. for my 2 cents worth, you would not have a deductible loss.  I have not done specific research in your case but generally, the code disallows losses in transactions between related parties. 

[newuser9]

So my understanding so far is that there are two portion to this.

The gift part is the 250k -100k mortgage which is a total of 150k and that needs to be ported on Form 709.

For the part sale portion.  How do I report this in turbo tax?  

Should I manually add it to form 4797?  If so how do I make it where it does not allow the loss?  

I think I am gonna get a CPA to do the Form 709 for me but I still like to use Turbo tax to do the rest as I have done so for the past 10 years.  Just need to figure out how I do this.

[Critter-3]

Either it is a gift or a sale not both ... on the personal return you will show the rental not as sold but removed from service then the receiver of the rental will use your basis in the property for their depreciation deduction.  I HIGHLY recommend you seek local tax assistance for both returns or at least get educated on this subject so you don't mess things up.

[tagteam]

Section 1.1015-4 is applicable to this scenario.

See https://www.law.cornell.edu/cfr/text/26/1.1015-4

[tagteam]

As for federal income tax reporting, this would most likely be considered a nonrecognition event since the "sales price" (which is effectively $100k) does not exceed the transferor's adjusted basis.

[Mike9241]

you can do this by checking the total disposition box

then in the asset worksheets, there are lines for the tax basis for gain or loss for both regular and amt purposes. you need to enter whatever numbers are required so no gain or loss shows up on the 4797. 

you just can not delete the rental worksheet because there is probably current year income/loss that needs to be reported but depreciation needs to be limited because at a certain date you gifted the property which is in fact the date of sale.  for tax purposes, your parents will get your depreciated tax basis because FMV is higher. they need to know this. 

since this was rental property before it was personal use property, the home sale exclusion will need to be adjusted should they sell. they will not get the maximum and they will have to recapture the depreciation you took upon sale

the home sale exclusion is affected by the non qualified use rule for the years the property was rented prior to us receiving it as a gift.

Only "non qualified use" after 2008 is included in the calculation. say they live in it for 10 years and it was a rental for 6 years. their maximum exclusion would be 10/16 X $500,000 

Deprecation since May 6, 1997 must still be recaptured, even in a home sale exclusion situation.

[newuser9]

I think my parents are going to rent it too.  I don't think they will be living in it.

I understand even if its converted in to a personal property they still need to pay the depreciation recapture.

I was worried how I was going to report this on my own income tax return besides the Form 709.

Others have mentioned I don't need to report it on my income tax return only on Form 709.

I really appreciate all the help for everyone.  I really feel that I gained a much better understanding after reading all these replies.

I been using TurboTax for over 10 years and I guess this is the first time I have to get a CPA as it doesn't seem to support gift tax.

Feel free to add anything as I will be reading up on these.  

[tagteam]

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@newuser9 wrote:

I understand even if its converted in to a personal property they still need to pay the depreciation recapture.

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If they merely convert it to personal use, they will not have to recapture depreciation at that time; only when they actually sell the property to an unrelated third party in a taxable transaction.

[Hal_Al]

Simple answer:  If the house is worth $250K and has a $100K mortgage, you have made a gift of $150K ("gift of equity"). You do not have a reportable sale*, only a gift, to report. The $40K in depreciation transfers to the new owner (they pay tax on it if and when they sell the house). Your cost basis of $150K also transfers to the new owner (they pay the capital gains tax, if and when they sell it). 

But, as others have said, taxes aren't simple.  Professional help may be warranted. 

* you do not have a sale because the sale price ($100k) does not exceed  your adjusted basis (Edited, per @tagteam 's reply below).

[tagteam]

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@Hal_Al wrote:

You do not have a reportable sale, only a gift, to report.

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I agree, but it is important to understand the reason that is the case; the sale price ($100k) does not exceed the transferor's adjusted basis. If it did, there would be a gain and a reportable sale.

[newuser9]

Thanks for all the replies.

I think I finally understand this whole process clearly:

Only thing that needs to be reported is on Form 709.

Since I have a net loss, I don't have to report it on my personal income.  Also I can't claim that lost either.

My parents would inherit my adjusted basis and use that moving forward along with all the depreciation I took over the years.  They would use that when they decided to sell.