client received an interest in a residence as a gift. An accountant planted the idea that she can take a loss on the sale because it's "investment property."
I recall the definition (but can't find the citation) of investment property as something along the lines of "purchased with the intent of selling at a profit." There was no purchase and property would be considered a personal residence for the owner who gifted the interest to the client.
I've established her basis, the question here is can she take a loss?
If as you say, the property was considered a personal residence for the owner who gifted an interest in that property to someone else, it appears it would not be proper to take a loss. One cannot write off a loss on a personal residence.
Sorry, I don't know of a citation, but something seems to be missing from the story. If gifted property is sold at a loss basis is the lesser of the donor's adjusted basis at the time of the transfer or FMV at the time of the transfer. So there must have been some time in between the transfer and the sale for there to be a loss.
What use was the recipient making of the property during that time?
If gifted property has a FMV at time of gift lower than donor's basis, then basis is FMV at time of gift to compute loss and is donor's basis to compute gain.
If gifted when FMV at time of gift is higher than donor's basis, use donors basis to compute gain or loss.
I disagree. the original owner no longer owns the house, so his intent as to what is now owned by the giftee is irrelevant. What matters is the intent of the giftee. The fact that he did not purchase the property is also irrelevant. If the giftee owns it with the intent to make a profit (i.e. is not the giftee's personal residence) it certainly could be considered investment property.
But how do you prove intent? I would expect there to be some section of the code that allows you file a statement with your return indicating that you are holding property XYZ for investment so that gains and losses on XYZ are capital gains, there will be no section
121 exclusion, and you won't be using XYZ (such as living in it, renting it out, running a business out of it). I found IRC 266, but it is just an election to capitalize carrying charges, not treat the whole thing as an investment. There is a similar election for currency contracts in section 988, so maybe there is one for real estate.
And herein lies the info necessary to actually answer the question.
The recipient was NOT gifted the property because the gift does NOT complete until the giftor (is that even a word?) died. The life estate creates an incomplete gift. The recipient has a remainder interest in the property as long as the giftor is alive, but the giftor can control what happens.
When the giftor dies the recipient will inherit the property and will get an ADJUSTED basis in it. We frequently say they will get a step up in basis but in this housing market it is possible that the basis will actually be stepped DOWN. Make sure to double check your basis calculations!
You've provided no information about whether the giftor is alive or dead and you've said nothing about whether the property was sold or not.
Just like any "investment" (used loosely here) there is neither gain no loss until complete disposition.
So can she take a loss - SURE, when she disposes of the property IF there is any loss to take. However, the real question is whether the loss is capital (Schedule D) or ordinary (Form 4797). To answer that we have to look to the nature of use of the property.
In the hands of the original owner it was personal residence. In the hands of the remainderman it was NOT a personal residence, but most likely a capital asset. The giftor lived in the house with a retained life estate, hence they would NOT have paid rent to the remainderman, hence it could NOT have been trade or business property, hence it is NOT eligible for ordinary loss treatment on Form 4797.
Most of the adult children I've worked with who sold an inherited house were actually able to claim a Schedule D loss. The heir inherits property and their basis is fixed when that happens. The immediately sell the property for THAT price. BUT they have to pay settlement costs, which increases the basis by the amount of those costs. The Schedule D shows a loss for the costs of settlement.
thanks for your response. I was not considering a 4797, only if they had an allowable loss on the Schedule D--my client received a 1099-S for her share of the proceeds from the sale and the transaction will be reported.
A quick claim deed (my client received a 1/3 interest) was filed shortly after purchase, so owner's basis and FMV at the time of the gift are pretty much one and the same. A significant loss was taken on the sale.
To return to the crux of the matter--if you receive an interest in real estate as a gift and you never use the property, can you claim that it is an investment? I think this is true for inherited property, does it hold true for a gift? Does the fact that the giver used it as personal property affect the outcome?
And just to muddle the whole issue--if I decided to prepare a return claiming a loss, would it be appropriate to disclose the position to the IRS?
So far so good, though it conflicts with OP's statement that the transferee received only a remainder interest while the donnor retained a life estate. So the original owner is still an owner of the property.
Again, ok so far as it goes. However even if the donnor gave the house outright but continued to live there without paying rent (as he is apparently doing), the fact that the "owner" would not be charging rent is evidence that the property is not held for investment.
You asked - if you receive an interest in real estate as a gift and you never use the property, can you claim that it is an investment?
That depends on the nature of the use of the property AND your intent. It doesn't have to be a rental to be an investment, it can be HELD as an investment. And being held as an investment doesn't necessarily mean that you can NEVER use it - for example, you could spend possibly 2 working weekends a year at the property to take care of necessary maintenance and still have it qualify, but if you spent every weekend there and it was located at the beach it would be hard sell.
You also have to look closely at the concept of YOU using it. This would include you, your friends and family especially if they used it for free. BUT you MIGHT be able to let your church group use it as a retreat, or maybe your son's Boy Scout troop could camp there and still have it qualify as an investment.
Remember the main issue here is INTENT and USE. So Document, Document, Document - put notes in with your tax returns (not to be sent in but as support like your other records) noting your intentions and how often you analyze the situation. The more contemporaneous records you have the better off you'll be if the position is questioned.
About disclosing the position to the IRS - by putting it on the return you will be disclosing it to the IRS. Just make sure to use the word INHERITED instead of a date for acquired. This will let them know how the property was acquired and will be sufficient to disclose everything they need to know.
If you're asking about the form where you disclose a position, I don't see that as appropriate. That form, the form number eludes me at the moment, is supposed to be used when you're taking a position that is CONTRARY to what was reported to you by a third part.
"Gil Faver" > transferee received only a remainder interest while the donnor
The original post said the gift was of "an interest" in property, not property itself. It also said that the donnor continued to live there after the transfer. These are inconsistent with saying the donnor no longer had any ownership interest, unless he was paying rent to the donnee. Given the issue, payment of rent would probably have been disclosed if it were the situation.
Again, the original post clearly stated the donnor continued to live in the property, after having given "an interest." The implication clearly was that full ownership was not given, and jumping to that conclusion without further information was not warranted.
thanks for all the responses. I am still learning about life estates, although I don't know how much space is left in this brain for new stuff.
I thought I had the basis nailed down; however, one article I came across said that the other kind of EA (enrolled actuary) might be needed for calculating basis. Yet the proceeds were divided evenly between the original owner and the two beneficiaries, so no actuarial tables were consulted there.
Thanks again for yall's contributions during the crunch.
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