Deduction for Forgiven Interest

well, I was really just thinking out loud, and you raise valid counters.

So, have you concluded you have a new technique for removing property from an estate? Is your new technique only relevant when the taxpayer wants to keep the income stream (or much of it) during his life? How does this compare with gifting a life estate?

Thanks for that information, Bill. That could make a big difference in this plan.

___ Stu

It's not a new technique. It's only a slightly different take on an old technique tailored for a specific person. That's what estate planning is all about. If one size fitted all, nobody would need lawyers or accountants.

That said, Bill's point about depreciation recapture occurring all at once in the first year of an installment sale will make what I had originally planned much less desirable.

Someone had mentioned that prevailing opinion is that a $5,000,000 gift can be given this year and not be drawn back into the donor's estate. My reading of the code is the opposite, so I need to go back and reevaluate that.

___ Stu

I did - I bookmarked one article on this issue -

I guess congress can do what they will. But, say the $5M (actually $5.12M) is extended for a year at a time. In 2016, it drops to $1M. Would a 2012 gift be subject to clawback? I read about how many lottery winners go bust, self imploding from having too much money too soon. I wonder how much of a $5M inheritance is left even after a year or two. Good luck to the IRS to actually get it back. To properly plug this hole, the rules should have clearly stated that using one's lifetime exclusion was subject to a $1M limit instead, and the full $5.12M only available on an actual death. Just my opinion.

I'm not one to complain about the tax code, but I do find the constant changes and ambiguities to be unnerving. Consider how many transactions are based on doing something now because such and such rule will change next year. A great waste of time and effort.

The statement above about depreciation recapture being taxed in the year of the installment sale whether or not there are payments in that year might be correct, but there's **no** depreciation recapture, almost certainly, in this proposed scenario. The depreciated property is real estate, and it would have been depreciated straight-line and

This is **not** depreciation recapture, this is unrecaptured section

It is convenient to use the less specific, though somewhat misleading, term, "depreciation recapture," to mean "unrecaptured Section 1250 gain," since the latter is triggered by (and limited to) cost recovery (aka depreciation) deducted or allowed (in most cases) on the asset being sold.

Short version: If we can't say "depreciation recapture" when we mean "unrecaptured Section 1250 gain," then is it not also appropriate to refrain from using "depreciation" when we mean "cost recovery"?

Note: The first paragraph above is the shorter, simplified (and, thus, somewhat misleading) description of what is going on.

My other reply notwithstanding, lotax is correct. Unrecaptured section

But is the tax recognized as payments are received on the installment sale? Or is it recognized all at once or in some other way/

Thanks. ___ Stu

The gain being reported under the installment method - in this scenario - will be recognized only as the installments are collected, i.e., as payments are received. In this scenario, there's no "depreciation recapture" - which is the type of gain that gets "triggered" by the sale, at the time of the sale, and is therefore recognized in the year of the sale, i.e., whether or not any payments, at all, are made in that year.

I hope this helps you address the income tax consequences of the proposed estate value freeze.

Yes, thanks. My take is that income tax payable on real estate, whether or not capital gain, will be less than estate tax if it were paid instead on the same property. So from that standpoint the sale of property might be helpful.

And, if gifts in excess of $1,000,000 are not brought back into the estate of a person who dies after the end of 2012 (contrary to my initial reading of the statutes, but I'm not always right), that is another thing that will be useful.

Thanks again.

___ Stu

until they change the tax code yet again, perhaps.

I looked at the article on the gift tax clawback for whether gifts over $1,000,000 would be included in the taxable estate for someone dying after the end of 2012 (i.e. the gift tax exemption is higher than the exemption allowed in the year of death).

The argument that there would be no clawback is based on a reading of instruction on form 706. Those instructions were created during a time when the exemption was increasing rather than decreasing.

However a plain reading of §2001 indicates that the instructions are wrong. It says, basically, that the taxable estate must include all taxable gifts (i.e. excluding the annual exemption, and charitable and spousal gifts). Then there is a deduction for tax that "would have been payable" under the tax rate schedule "in effect at the decedent's death...."

If someone makes a gift of $5 million this year, and dies next year when the lifetime exemption is $1 million, it appears that the entire $5 million must be included, with credit for the tax on $1 million.

Personally I wouldn't want to be one of those who take the risk. I've seen the IRS go after must less productive things. I suspect that anyone who takes the no-clawback stance is very likely to leave very disappointed heirs.

___ Stu