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LegalGround >> ATTN: Steve or other tax lawyer


10/10/08 11:06 AM
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Fake Pie
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This is pretty broad and it is free work so I don't want to spend weeks researching the stuff. So if you know this off the top of your head then go ahead and respond but don't spend any time looking into it.

Basically someone wants to transfer commercial income producing property (building + land with a tenant alrady leasing on it) with a low tax basis to his kid. And very broadly, he wants to know the tax consequences and how to avoid them if possible. I know if he sold it it would be cap gains at 15% but that is all I know.

I know nothing about the gift tax. I also don't know if he could sell it for like a thousand bucks or if the IRS just imputes fair market value and makes you pay cap gains on that. I will find my tax notes sometime from school but I thought maybe this was basic enough to just ask.
10/12/08 5:36 PM
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seg
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 I believe that he would incur no income tax on the transfer.  The kid would take a carryover basis in the property and as of the effective date of the gift he would begin to claim the depreciation, income, etc., as his own.

The dad would be making a taxable gift, but he has a lifetime $1 million gift tax exclusion so it is very unlikely that any actual gift tax would be due.  However, the gift would reduce his remaining applicable credit amount for estate tax purposes.  If the gift is made from the dad and mom they might be able to split the gift and it treat it as being made 1/2 by each of them.

Everybody gets a $12,000 per year per donee annual gift tax exclusion so that amount would be reduced from the value of the otherwise taxable gift.

For gift tax purposes, the thing that matters is the fair market value of the gift on the date of transfer, the basis is irrelevant other than for determining the kid's basis on a going-forward basis.

So, bottom line is the gift would likely be taxable, but the $1 million gift tax exclusion would likely result in no actual tax being due.  In any event, if the gift is for more than $12,000, a gift tax return would have to be filed by April 15th of next year even if no tax is due.

How much is the property worth?
10/12/08 8:04 PM
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Fake Pie
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Probably around half a mil. Thanks for the info. He has another property and he may want to do that one as well so all told it might eat up his 1mil lifetime exclusion.

Thanks for all the info, that shit sounds dead on and makes sense from what I remembered from tax class.

So say the basis is 100K now, the kid gets carryover so that someone has to pay cap gains at some point in the future right? But if the guy dies and the property passes then, the kid gets a stepped up basis to fair market value right? That is the benefit of dying with it, right?

And you are saying fair market is what we use to see how much of the million exclusion is eaten up right? So if he goes over the million, what is the taxable rate? Cap gains or his income rate?

Thanks man, this is great. Saved me starting from scratch.
10/13/08 10:14 AM
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seg
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Edited: 10/13/08 10:16 AM
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At least under current law (no matter who wins the white house the estate and gift tax rules are likely to be revisited in 2009) if he were to die tomorrow owning the property and leave it to his son, the property would receive a basis equal to its FMV on the date of death.  If the kid turned around and sold it the next day, there would be no capital gain.  If he instead gifted the property today and the kid sold the property tomorrow, the kid would recognize gain on the difference between the old man's basis (the kid gets carryover basis) and the sale price. 

That is one advantage of keeping the property in the old man's estate.  If he is about to kick the bucket, it may make more sense for him to keep the property and leave it by Will to his son.  If the property is appreciating rapidly (I doubt it) then sometimes it makes sense to make a gift now so that all future appreciation is moved out of the dad's estate.

For purposes of determining the amount of the gift (which in turn determines how much of the $1 million gift tax exclusion gets eaten up) the important number is the FMV on the date of the gift, not the basis.  So, you will probably need to get an appraisal or something to support the FMV you are going to use for purposes of reporting the gift. 

For marginal rates, it won't be his marginal income tax rate or the capital gains rate.  The estate and gift taxes have their own marginal rates.  I don't know them off the top of my head, but you're probably looking at about a 40% marginal rate.  Of course, the tax would only apply to the amount of the gift in excess of $1 million.

This may be more advanced than you want to get into, but often times in these types of situations the father will form an LLC or a limited partnership, contribute the property to the entity and then make annual gifts of partial interests in the entity to the son so as to limit the amount of the gift in any one year.  If interested, just google "family limited partnership" and a million articles will pop up explaining the concept.

 
10/13/08 10:42 AM
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Fake Pie
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Actually the property is inside of an LLC at the moment. So you are saying give about 12K a year's worth of the LLC each year and that way you don't touch any of the 1mil lifetime exclusion eh? That is a really good idea. Is there a revenue ruling on the matter with a safe harbor perhaps? Or is it pretty hunky dorey?

I guess we also have to wait and see what happens next year in Congress... if Obama wins maybe they should hurry up and just do it just in case the 1million gets reduced or eliminated.

Thanks for all the info Seg. Obviously I'll do my own research but it really helps to get a grasp on where/what i should be looking at first. I appreciate it.
10/13/08 3:48 PM
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StephenL
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check into whether your state, county, or city will want to get their hands into this as well.

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