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Gifted Rental Property

My dad is planning on gifting his rental property to me and my brother 50-50 ownership. Our plan is to move into the property for 2 years and then sell the property. A few questions. As we are both married and we are going to live in the house for 2 years, do we both qualify for the FULL $500k exclusion eac OR will we be subjected to the non qualified use rule for the years the property was rented prior to us receiving it as a gift? Or do the years prior to receiving as a gift not count as that relates to a different owner? Also, when we sell will we be subjected to any depreciation recaptured that occurred from depreciation claimed prior to us receiving the property as a gift?? 

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Level 15

Gifted Rental Property

With respect to the Section 121 exclusion ($250,000 or $500,000 if married filing jointly), you and your brother will qualify if both of you own and use the home as your main residence for two of the last five years leading up to a sale. 

 

You and your brother will also qualify for the $500,000 exclusion provided you and your brother own the home for two out of the last five years leading up to a sale and you and your brother and your wives use the home as your main residence for two of the last five years leading up to a sale (your spouses do not have to own the home or otherwise be on title; they simply need to use the home as their main residence).

 

See https://www.irs.gov/publications/p523#en_US_2019_publink10008996

 

Gain subsequent to the 2008 tax year (starting January 1, 2009) would also have to be allocated between qualified and nonqualified use per Section 121(b)(5).

 

 

With respect to the gift, your father will most likely have to file a gift tax return (Form 709) although no gift tax will be due unless your father has exceeded the lifetime gift tax exemption of $11.58 million.

 

You and your brother will, however, take your father's adjusted basis in the home, which will include the depreciation deductions allowed (deductions he has taken) or allowable (deductions he should have taken) during the time the property was held for rental use and there will be a recapture event when you sell the property (i.e., you will not be able to exclude the allowed or allowable deductions from any eventual gain).

 

In fact, you and your brother will have a split basis if the fair market value of the property at the time of the gift is less than your father's adjusted basis. In that event, your basis depends upon whether you have a gain or loss on an eventual sale. . Your basis for figuring gain is the same as your father's adjusted basis plus or minus any required adjustment to basis while you held the property. Your basis for figuring loss is its fair market value when you received the gift plus or minus any required adjustment to basis while you held the property. If you use your father's adjusted basis for figuring a gain and get a loss, and then use the fair market value for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property.

 

See https://www.irs.gov/publications/p551#en_US_201812_publink1000257002

 

Otherwise, if the fair market value of the property at the time of the gift is equal to or greater than your father's adjusted basis (which is more likely), your basis is the donor's adjusted basis at the time you received the gift.

 

You might want to seek local professional legal and tax counsel for this matter before proceeding.

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3 Replies
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Level 15

Gifted Rental Property

With respect to the Section 121 exclusion ($250,000 or $500,000 if married filing jointly), you and your brother will qualify if both of you own and use the home as your main residence for two of the last five years leading up to a sale. 

 

You and your brother will also qualify for the $500,000 exclusion provided you and your brother own the home for two out of the last five years leading up to a sale and you and your brother and your wives use the home as your main residence for two of the last five years leading up to a sale (your spouses do not have to own the home or otherwise be on title; they simply need to use the home as their main residence).

 

See https://www.irs.gov/publications/p523#en_US_2019_publink10008996

 

Gain subsequent to the 2008 tax year (starting January 1, 2009) would also have to be allocated between qualified and nonqualified use per Section 121(b)(5).

 

 

With respect to the gift, your father will most likely have to file a gift tax return (Form 709) although no gift tax will be due unless your father has exceeded the lifetime gift tax exemption of $11.58 million.

 

You and your brother will, however, take your father's adjusted basis in the home, which will include the depreciation deductions allowed (deductions he has taken) or allowable (deductions he should have taken) during the time the property was held for rental use and there will be a recapture event when you sell the property (i.e., you will not be able to exclude the allowed or allowable deductions from any eventual gain).

 

In fact, you and your brother will have a split basis if the fair market value of the property at the time of the gift is less than your father's adjusted basis. In that event, your basis depends upon whether you have a gain or loss on an eventual sale. . Your basis for figuring gain is the same as your father's adjusted basis plus or minus any required adjustment to basis while you held the property. Your basis for figuring loss is its fair market value when you received the gift plus or minus any required adjustment to basis while you held the property. If you use your father's adjusted basis for figuring a gain and get a loss, and then use the fair market value for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property.

 

See https://www.irs.gov/publications/p551#en_US_201812_publink1000257002

 

Otherwise, if the fair market value of the property at the time of the gift is equal to or greater than your father's adjusted basis (which is more likely), your basis is the donor's adjusted basis at the time you received the gift.

 

You might want to seek local professional legal and tax counsel for this matter before proceeding.

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Level 15

Gifted Rental Property

Highlighted
Level 15

Gifted Rental Property

if you and your brother were gifted it and sold it at a gain depreciation recapture would apply.  however, if inherited after the death of your father/parents you get a step-up to date a death value,  so if sold immediately afterwards there no gain (probably a loss due to selling expenses) and no depreciation recapture.  depending on the age of your father it might be best to consult a financial advisor to look into everything to see if gifting is the best idea,.  they will ask questions and get information about things that may not have been presented in your thread and that could make a big difference, 

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