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.
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.
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.
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.
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.
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.
@macuser_22 wrote:
...Without the 709 the $11 million exemption does not apply and the tax is due.
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.
@Anonymous_ wrote:
@macuser_22 wrote:
...Without the 709 the $11 million exemption does not apply and the tax is due.
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.
Are you saying that there is no possible penalty for failing to file a 709?
@macuser_22 wrote:
Are you saying that there is no penalty for failing to file a 709?
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.
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).
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.
@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).
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.
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.
@Anonymous_ wrote:
@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).
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?
@hcjontax wrote:
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.
You have that backwards and it has nothing whatsoever to do with a 709 (a 709 only applies to the giver of a gift - never to the receiver). A gifted property does *not* have a higher cost basis. A gift retains the cost basis of the giver. Property that are sold have the cost basis of the buyer. (Which goes back to my prior comments).
@macuser_22 wrote:
@hcjontax wrote:
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.
As an example, suppose a property was acquired in 1950 for $10,000 and today is is worth $1,000,000, As a gift the receiver of the gift has a gain of $990,-000. But if the property was was sold to the other person (the receiver) in 2018 when the property was worth $800,000 then the receiver would only have a gain of $200,000.
@macuser_22 wrote:
@hcjontax wrote:
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.
You have that backwards and it has nothing whatsoever to do with a 709 (a 709 only applies to the giver of a gift - never to the receiver). A gifted property does *not* have a higher cost basis. A gift retains the cost basis of the giver. Property that are sold have the cost basis of the buyer. (Which goes back to my prior comments).
@macuser_22 wrote:
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?
If there is no tax due, then probably nothing (but I believe there is a general failure to file penalty somewhere in §§7201-7217).
Again, if you cannot find a specific penalty in the Code or Regs, then it simply does not exist; a penalty cannot merely be assessed because it seems correct to do so or it would otherwise be illogical not to apply a penalty.
@Anonymous_ wrote:
@macuser_22 wrote:
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?If there is no tax due, then probably nothing (but I believe there is a general failure to file penalty somewhere in §§7201-7217).
Again, if you cannot find a specific penalty in the Code or Regs, then it simply does not exist; a penalty cannot merely be assessed because it seems correct to do so or it would otherwise be illogical not to apply a penalty.
Why is there zero tax due? -- only because the $11 million exemption makes it so. How does one get the gift applied to the exemption? - only one way - by filing a 709 form. Agreed, that filing late 709 means that there will be zero tax due, but there is a penalty due based on what the tax would have been had the 709 never been filed. What is due is the *penalty*, not the tax. However, the IRS will accept almost any reasonable explanation why the 709 was not timely filed and forgive the penalty.
@macuser_22 wrote:
Why is there zero tax due? -- only because the $11 million exemption makes it so. How does one get the gift applied to the exemption? - only one way - by filing a 709 form.
The exemption is provided for in Section 2505 of the Code and its applicability has nothing to do with the filing of Form 709. If it were otherwise, that would be spelled out in the Code or Regs and it is not.
@Anonymous_ wrote:
@macuser_22 wrote:
Why is there zero tax due? -- only because the $11 million exemption makes it so. How does one get the gift applied to the exemption? - only one way - by filing a 709 form.The exemption is provided for in Section 2505 of the Code and its applicability has nothing to do with the filing of Form 709. If it were otherwise, that would be spelled out in the Code or Regs and it is not.
Then what is the point (or purpose) of the 709 at all if it can be simply ignored with no tax or penalty. Are you suggesting that it can be ignored since it makes no difference?
@macuser_22 wrote:
Then what is the point (or purpose) of the 709 at all if it can be simply ignored with no tax or penalty. Are you suggesting that it can be ignored since it makes no difference?
I am simply suggesting that a penalty cannot be imposed without statutory authority.
You appear to be arguing that a penalty can be imposed but have not yet cited a Code section that imposes a penalty other than one that is based upon tax due.
You also stated that the lifetime exclusion does not apply unless a 709 is filed (and tax is due as a result) but there is absolutely no authority (that I can find) for that proposition.
ALL gifts are taxable to the giver - §2503(a).
Only the first $10,000 ($15,000 now adjusted for inflation) is excluded from the tax §2503(b).
The tax imposed is defined in §2001.
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.
@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.