Retroactive Gift Tax Filing to Decrease Capital Gains

[hcjontax]

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!

[macuser_22]

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.

[hcjontax]

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]

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.

[hcjontax]

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-...

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.

[macuser_22]

If that were true then nobody would ever file a 709 file.   It only applies to the $11 million exemption *if* the 709 is filed.  Without the 709 the $11 million exemption does not apply and the tax is due.    Ask your attorney.

[Anonymous]

assuming the title is transferred to mom, who is going to get and keep the money from the sale?  it better be mom. if she after the sale transfers the cash to your brother, even if she files a gift tax return, the IRS could and would argue that the sale was your brother's.  the IRS has had great success in arguing that certain transactions are shams and should be disregarded for tax purposes.  

[Anonymous_]

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@macuser_22 wrote:

...Without the 709 the $11 million exemption does not apply and the tax is due.  

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@macuser_22 

Do you have any authority for the proposition stated (in the above quote)?

Treas. Reg. §25.6019-1(f) requires that a gift tax return be filed even if there is no tax due, but I cannot find any authority for the proposition that failing to file a gift tax return serves to eliminate the applicable exclusion amount.

[macuser_22]

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@Anonymous_ wrote:

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@macuser_22 wrote:

...Without the 709 the $11 million exemption does not apply and the tax is due.  

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@macuser_22 

Do you have any authority for the proposition stated (in the above quote)?

Treas. Reg. §25.6019-1(f) requires that a gift tax return be filed even if there is no tax due, but I cannot find any authority for the proposition that failing to file a gift tax return serves to eliminate the applicable exclusion amount.

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Are you saying that there is no possible penalty for failing to file a 709?

[Anonymous_]

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@macuser_22 wrote:
Are you saying that there is no penalty for failing to file a 709?

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Yes, where there is no tax due and with the possible exception of a general failure to file a required return penalty (which is typically a fixed amount and usually relatively minimal).

If you can locate anything in the Code or Regs that states otherwise, I would appreciate a cite thereto.

[macuser_22]

Then what is the point of *anyone* with less then $11 million in assets to ever file a 709?    AFAIK the 709 is the form that *applies* the exemption, without it then there is not exemption.    I believe other code sections actually apply the tax (§2500-2501 possibly).

[hcjontax]

The cash would be deposited into a joint account under her and my name. And then majority would be put into an investment account under her name, while rest used to pay off any other debts.

[Anonymous_]

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@macuser_22 wrote:

Then what is the point of *anyone* with less then $11 million in assets to ever file a 709?    AFAIK the 709 is the form that *applies* the exemption, without it then there is not exemption.    I believe other code sections actually apply the tax (§2500-2501 possibly).

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A 709 is required to be filed regardless of whether or not tax is due; that is clearly in the Regs (see the cite in my previous post).

Regardless, it is the Code and the Regs that apply the exemption, not the form. I have also read the relevant sections of the Code and Regs and cannot find anything that abrogates the exclusion as a penalty for failing to file Form 709.

[hcjontax]

One reason for someone with below $11mm limit to file a 709, is to show a higher cost basis for a property that was gifted, so that when it is sold, the capital gains tax is lower for the person they gifted it to.

[macuser_22]

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@Anonymous_ wrote:

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@macuser_22 wrote:

Then what is the point of *anyone* with less then $11 million in assets to ever file a 709?    AFAIK the 709 is the form that *applies* the exemption, without it then there is not exemption.    I believe other code sections actually apply the tax (§2500-2501 possibly).

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A 709 is required to be filed regardless of whether or not tax is due; that is clearly in the Regs (see the cite in my previous post).

Agreed, but if *required* to be filed then what is the penalty for not filing it if I am incorrect?    There is clearly a penalty for not filing it, but what is it if it does not exist?