Retroactive Gift Tax Filing to Decrease Capital Gains

Forum|Forum|5 years ago
November 12, 2020
1 reply
3 views

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!

Tax Advice

macuser_22

Alumni - Champ

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.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

hcjontaxAuthor

Level 2

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.

hcjontaxAuthor

Level 2

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.

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.