Basis of Property Purchased For $1 From Parents

It is quite obviously a gift. But an IRS auditor would almost certainly put your basis at $1 because that is what you paid for it and then go after your parents for not filing a gift tax return.

Why not just a straight gift? Why not but it from them, make monthly payments, and have them forgive the principle one year at a time?

Dick

First we should clarify what makes something a gift.

The difference between FMV and the $1 paid makes this a gift.

That's true even if the parents neglect to file a ift tax declaration.

Assuming the property has appreciated since the parents acquired it, their basis becomes the child's basis and their acquisition date is child's date.

If the FMV as actually lower than parent's basis, the property will carry along a dual basis until sold.

Thanks for the reply. Sorry if I wasn't clear.

Property was sold to 3 siblings for $1 approximately 10 years ago. You are correct that no gift tax return was filed. Parents are now deceased. Property was not used as a residence by any of the siblings, nor was it rented. A child of one of the siblings was using it as a residence rent free but paying all of the expenses. That child has now purchased the property from the 3 siblings at a near market rate and I am attempting to determine the basis for this sale.

I thought pub 551 was fairly clear that in the situation where a property was acquired by gift and at the time the FMV exceeded the donor's basis that the donor's basis was passed to the recipient of the gift.

However, one of the siblings has a tax preparer telling them that the basis should be the FMV on the date of the gift. I don't agree and my client (a different sibling) obviously wants to use the FMV suggested by the other preparer.

Knarc

You may disagree with that other tax preparer in good conscience, too.

ChEAr$, Harlan Lunsford, EA n LA

Basis is passed along with a gift (unless FMV dropped, you can't pass along a built-in loss). Only death (that I know of) can create a step up in basis. Which is why the "give the house to the kids for a buck" route is usually the wrong way to go. The kids could have chipped in to pay for an irrevocable trust, which would have provided some protection, and allowed the step up upon death. JOE

Out of curiosity, when the estate tax is repealed in 2010, would we still have this step-up of basis?

I think the statute of limitations is 10 years, so the IRS cannot come after your parents or estate for not filing a gift tax return. But I'm not totally sure about this statement. See

I see the purchase of a house for $1 as a gift, and since it was made while your parents were alive, your basis for the house is their basis if their basis is less than 100k. However, if they bought the house for more than 100k, like 150k and its price decreased and its FMV was

Did the title of the house really change 10 years ago? If yes, then the above paragraph seems right to me.

Did the parents live in their house - after the gift - until they died? They may have created an "incomplete gift" and their heirs should look further into this. It may have income tax consequences to the heirs.

========================================= MODERATOR'S COMMENT: Please trim away all extra text before posting!!!

As it sits now, the answer is probably yes, but Congress may change that.

Those who thought taxation without representation was tyranny ought to see what it is like with representation,

Dick

I am packing for a trip, so can't research this too much, but I understood the downside to the 2010 repeal is all stepped up basis is lost. I'm sure someone will have a well documented answer before my return. But the 2010 was not the free lunch it appeared to be. JOE

The law as it is now, and I agree it will almost surely change, allows step up for the first $1 million of assets, and the executor gets to pick which assets get the step up.

Sorry, that's wrong. The statute of limitations never starts to run on a tax return that is not filed.

You have misunderstood the artile. In any case, the article deals with income tax, not gift tax returns.

If there was no gift tax or estate tax due (including the value of the gift in the estate) then it's probably ok. That wouldn't change the basis rule, though.

Stu

A little over a year later, anyone care to offer any updates?

-Mark Bole