Retroactive Gift Tax Filing to Decrease Capital Gains

Forum|Forum|5 years ago
November 12, 2020
1 reply
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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.

Opus 17

Level 15

@macuser_22 wrote:
However, you can get a "credit" for the amount of the gift tax that is applied to the lifetime exemption (not exclusion - only the first $15,000 is excluded) §2505 and other related sections. You get the credit by filing the 709 form that applies the taxable gift to the credit.

Filing the 709 late to get the credit can result in a penalty based on the tax imposed by §2001.

I cannot find any language in the Code or Regs that state a taxpayer loses the credit provided for in Section 2010(c) (or incurs a penalty) simply by failing to file Form 709.

To put it another way, I cannot find any language stating that filing Form 709 is required to secure the credit against tax provided in the Code.

Can you find such language in the Code or Regs? If you cannot, then any such penalty does not exist and you are arguing based upon your beliefs rather than actual statutory language.

I am not going to get into this fight, except to point out that under the tax code, all income is assumed to be taxable unless proven otherwise.

I will also note that the statute of limitations is three years from the date the tax return is filed. If a required return is not filed, the clock on the statute of limitations never starts running, and the taxpayer can be audited and penalized at any indefinite time in the future.

For the taxpayer, the important point is going to be to document exactly how each property transfer occurred in order to document the basis. The basis of the property will be the same regardless of whether any paperwork is filed. The issue of the missing gift tax return will only come up if the taxpayer is audited regarding the reporting of the capital gains. The taxpayer should keep all of the documents and proofs that they gather and use to determine the basis for at least six years after the sale.