Retroactive Gift Tax Filing to Decrease Capital Gains

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

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.

macuser_22

Alumni - Champ

@Opus 17 wrote:

....all income is assumed to be taxable unless proven otherwise.

I agree; all income is generally taxable unless specifically excluded under §§101-140. Gifts are specifically excluded, but if an examination involves reviewing various financial records, such as bank statements for example, then the individual under review had better be able to explain large deposits to accounts.

@Opus 17 wrote:
For the taxpayer, the important point is going to be to document exactly how each property transfer occurred in order to document the basis.

In fact, there is language in the Code (I believe §6001) that specifically requires documentation (statements and records) be retained to comply with promulgated rules and regulations.

@Opus 17 wrote:
....If a required return is not filed, the clock on the statute of limitations never starts running....

Correct (again) but merely because the statute of limitations does not start it does not follow that a penalty is assessed and/or deductions, exemptions, et al, are lost.

For example. with respect to gift tax returns, Treas. Reg. §25.6019-1(f) provides:

The return is required even though, because of the deduction authorized by section 2522 (charitable deduction) or the unified credit under section 2505, no tax may be payable on the transfer.

The language clearly implies that the unified credit is not lost if a return is not filed and that should not come as a surprise.

For instance, a federal income tax return for 2019 is generally required to be filed by a single person whose gross income exceeds $12,200 but there is no penalty if a refund is due (and the return is not filed because, perhaps, the refund is miniscule). The taxpayer does not, out of nowhere, lose the $12,200 standard deduction as a result of failing to file a return.

You will not find any reference to the 709 or 709 filing requirements in the tax code because the 709 (like other forms) are an IRS invention used to interrupt and apply the actual code as defined in various code section in chapter 12 that defines the tax, the penalties and the $15,000 exception. Other then the $15K exception, there is no other exception. The $11.4 million is not an exception to the tax, the tax is still there even though it can be credited to the $11.4 million lifetime exclusion (not exception). Even with the exclusion, the tax is still there (even though it does not have to be paid if applied to the exclusion) and can be computed on the gift which is what the penalty is based on. It is all in the code but in bits and pieces in various sections.

**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.**