Selling property that was gifted

[ChickenStash]

Back in October of 2019, my dad transferred the deed for some property over to me for $1, according to the paperwork filed with the county. It had been for sale for years and he wanted to get rid of it to simplify his finances due to declining health. Rather than "donate" it back to the HOA, he asked if I wanted it and I accepted. Out of the blue, I got an offer on it this week for a reasonable price and decided to take it. There is a contingency on their end but it will probably go through in the next month or so.

Now, the questions... What is this going to look like from a tax perspective? Since he transferred the deed saying $1, will I be on the hook for capital gains for the whole sales price? I do know what it was originally purchased for and it was about 2x what I'm getting. Since the transfer was over a year ago, I assume this will qualify as a long-term gain. Any other questions I'm not aware of?

I don't buy/sell real estate much so I'm pretty green on the process. The land isn't worth much so the actual tax cost won't be much of a burden but I would like to have an idea what I'm in for come tax time next year.

Thanks!

[cool7hand]

I think your analysis is correct. In fact, I've heard some tax professionals say you should have paid taxes on the initial transfer insofar as you received a windfall on the sale price v. FMV. You might avoid being pennywise and pound foolish by paying for some tax advice.

[former player]

I think your analysis is correct. In fact, I've heard some tax professionals say you should have paid taxes on the initial transfer insofar as you received a windfall on the sale price v. FMV. You might avoid being pennywise and pound foolish by paying for some tax advice.

Given that the intial purchase price was twice the selling price, I would have thought that OP is better off paying tax on the sale price rather than the initial purchas price.

OP, you did your dad a favour, you've got an offer for not much work on your part, and you are making a profit even after paying taxes.  It all seems good to me.

[Villanelle]

I think your analysis is correct. In fact, I've heard some tax professionals say you should have paid taxes on the initial transfer insofar as you received a windfall on the sale price v. FMV. You might avoid being pennywise and pound foolish by paying for some tax advice.

Given that the intial purchase price was twice the selling price, I would have thought that OP is better off paying tax on the sale price rather than the initial purchas price.

OP, you did your dad a favour, you've got an offer for not much work on your part, and you are making a profit even after paying taxes.  It all seems good to me.

I think Cool7 was referring to the issue that he basically received large gift on which he didn't pay taxes.  Getting a $50k property for a dollar is basically a $49,000 gift, but no taxes were paid on that amount.  That seems to be where there might be trouble here.

But I do agree that even if the OP has to pay taxes, it's essentially free money.  Well, not free, I suppose, because he paid $1 for it.   

[seattlecyclone]

If it was a straight gift you would generally retain the giver's cost basis. You paid $1 which makes it almost but not quite a gift and therefore probably more complicated. I don't know the answer off the top of my head, sorry.

[AccrualWorld]

A sale of property for less than fair market value when made to a complete stranger is just considered a loss for the seller. However, since your transaction wasn't arms-length, since you are his son, I believe the transaction should be treated as follows:

So if the property was worth 100k, $99,999 was a gift to you.
You assume your dad's basis like you would have if it was fully a gift. So if they bought for 50k, your basis would likely be 50k.

https://www.thebalance.com/can-i-sell-my-home-for-a-dollar-3505414
https://www.marketwatch.com/story/how-to-give-your-home-to-your-children-tax-free-2015-02-23

[Sandi_k]

IANAL or CPA, but my understanding is that it depends on the value of the property - if it's under $15k, you're fine. If it's over $15k, then yeah, gift process applies.

1) Your dad's basis is what *he* paid for it, plus any improvements (did he run utility lines to the property? That would be an improvement, and can be added to the basis).

2) When he gifted you the property, it means you got HIS basis.

3) HE was supposed to file a form with his taxes in 2019, noting that the gift exceeded the $15k gift exclusion threshold for the year. If he didn't file that form, I would work with him to submit a revised 1040 for 2019, including this form.

4) The giftee never owes taxes for the gift, so YOU are fine.

5) Now, if you are selling, you subtract the sale price from the gift's basis, and end up with taxable profit, or a loss. If there is no profit, no taxes are due. And since it's a "personal" loss rather than investment loss, I don't think you can claim a loss on your taxes.

This is my understanding of the process, but do not rely on it for legal advice. Consult your own lawyer or CPA to confirm.

[ChickenStash]

Hmm. Sounds like this is going to be more complex than I originally thought. I guess I shouldn't be surprised - I <3 IRS. Based on the convo so far, here's some additional details that appear to be relevant now.

The original purchase price was $26k 15-20 years ago. The selling price is $12k which is in line with the current values of the neighboring lots. As far as I know, these values haven't changed since late 2019 when I got the lot. The lot was never improved or built up - the half acre of rock and dirt they bought back then. It was supposed to be where they'd build a retirement home but things changed. Another wrinkle is that when I say Dad, while he was the only Dad I really knew, legally he was my step-dad for 30+years up until he and my Mom divorced and he wound up with the lot. The divorce was before the lot was transferred to me. There was never an official adoption so from a legal perspective we might be considered random strangers at the time of the transfer despite the history. I saw some articles saying the IRS doesn't end step-parent relationship at a divorce, though.

Given all that, it sounds like I might be scooting under the 15k gift limit since the value at the time of transfer was reasonably the same as the selling price (12k). This will all be taking place in tax year 2021 but maybe I can try running it though my tax software as an experiment with this year's info just to see where it takes me.

Another thing I don't know is if my Dad claimed that transfer as a sale with at a loss (26k purchase, $1 sale) on his 2019 taxes. I would assume if he did then I really can't say it was a gift (although I question if the IRS would be able to figure it out).   

[SimpleCycle]

"Selling" a property below market value to someone you have an existing relationship with is a gift, regardless of if you have a legal familial relationship or not.  Even if your Dad claimed it on his 2019 taxes as a capital loss, the IRS would still consider it a gift, not a loss, which could spell trouble for him but not for you if you're following the correct procedures.

So you got an $11,999 gift, no gift return was triggered in 2019.  You also were gifted his basis, so there is no taxable gain.

I'd confirm this advice with a professional, since you shouldn't take legal or tax advice from the internet.  But I am fairly sure you are in the clear.

[AccrualWorld]

Hmm. Sounds like this is going to be more complex than I originally thought. I guess I shouldn't be surprised - I <3 IRS. Based on the convo so far, here's some additional details that appear to be relevant now.

The original purchase price was $26k 15-20 years ago. The selling price is $12k which is in line with the current values of the neighboring lots. As far as I know, these values haven't changed since late 2019 when I got the lot. The lot was never improved or built up - the half acre of rock and dirt they bought back then. It was supposed to be where they'd build a retirement home but things changed. Another wrinkle is that when I say Dad, while he was the only Dad I really knew, legally he was my step-dad for 30+years up until he and my Mom divorced and he wound up with the lot. The divorce was before the lot was transferred to me. There was never an official adoption so from a legal perspective we might be considered random strangers at the time of the transfer despite the history. I saw some articles saying the IRS doesn't end step-parent relationship at a divorce, though.

Given all that, it sounds like I might be scooting under the 15k gift limit since the value at the time of transfer was reasonably the same as the selling price (12k). This will all be taking place in tax year 2021 but maybe I can try running it though my tax software as an experiment with this year's info just to see where it takes me.

Another thing I don't know is if my Dad claimed that transfer as a sale with at a loss (26k purchase, $1 sale) on his 2019 taxes. I would assume if he did then I really can't say it was a gift (although I question if the IRS would be able to figure it out).

It's really a lot simpler than you think it is. It can basically be treated as (almost) entirely a gift, since it was $1. Your dad should file a gift tax form for the gift, but that doesn't really matter unless you expect your dad do pass away with a multi million dollar estate (~11M is the threshold for estate taxes).

What may be problematic though is you said he claimed it in his taxes as a sale with a loss. Did he actually get a tax benefit from the sale? If so, there's going to be issues and he'd need to amend it. You don't get losses for primary residences, so check if he treated it on his return as an investment property. Then check if he actually was able to take a deduction for the sale. If so, think of the mechanics behind this: selling a property for $1 to someone close to you and taking a tax benefit from it. That would most certainly not be allowed, as it's basically fraud.