Hi everyone,

I have a tax question on real estate. My husband and I have taken depreciation on my house for the past years (like ~17 or so) and have decided to sell it to my son last year. If it was sold at a $1 to him. What are the tax implications? Do I have to pay like ~$200k to the government because I took the depreciation benefit over the years? The house is only worth $500k in its value.

When we did the transaction, the lawyer said that we should sell at $1 and that there would be no taxes. And so, we did what he told us. But now everyone else is telling us that we need to pay the taxes. The lawyer screwed us over unfortunately.

We plan to still live at the house until the day we die and so, do we still need to pay the taxes? Is there a way to nullify the transaction? Does drafting a living estate help in anyway? Please share your thoughts.

“I have a tax question on real estate. My husband and I have taken depreciation on my house for the past years (like ~17 or so) and have decided to sell it to my son last year. If it was sold at a $1 to him. What are the tax implications?==============>The IRS ‘d treat it as a gift from you,parents, to a child.As long as the FMV of the pty exceeds $13K(If you and your spouse want to give a joint gift to yourchild, your exclusion amount equals both of your individual exclusion amounts added together. Thus, in 2012, married couples can give gifts of up to $26Kwithout paying taxes on them because each member of the couple has an exclusion of $13K. This rule applies only to married couples, not to friends or other persons who wish to give gifts together.



“Do I have to pay like ~$200k to the government because I took the depreciation benefit over the years? The house is only worth $500k in its value.”=================>You do not pay the ordinary tax on the recaptured depre taken previously since you didn’t dispose of the pty but you gave it to your child as the gift ,however, your child, the donee, needs to pay ordinary income tax on the recaptured depre when he deposes of the pty. your child startswith a new 27.5-year depreciation schedule, but using the donor's carryover adjusted basis in the property as long as the FMV of the gift exceeds the original basis of the pty.

“When we did the transaction, the lawyer said that we should sell at $1 and that there would be no taxes. And so, we did what he told us. But now everyone else is telling us that we need to pay the taxes. The lawyer screwed us over unfortunately. “=========>It depends on the situation; The IRS collects a federal gift tax on certain gifts. As of 2012, if you, one donor, give over $13K($26K for gift splitting for both you and your spouse) in a combination of money and property annually to one single recipient, that donor must file a federal gift tax return with the IRS. In 2013, the annual gift tax exclusion rises to $14K; So what I Mean a long as the FMV of the pty exceeds $14K (28K for both you and your spouse) then, yo need to file Form 709; if the FMV of the pty gifted exceeds $28K , then both you and your spouse must file form 709.HOWEVER, as long as the donor's (you and your spouse)lifetime gifts do not total more than $5.12 million for 2012, $5.25mil for 2013, the donor will not have to pay a tax. But, if total lifetime gifts total more than $5.25 million for 2013, the donor may have to pay a gift tax equal to 35 percent of the amount given over $5.25 million. The recipient of the gift,your son, however, does not have to file a gift tax return or pay any gift tax, no matter how large the annual or lifetime gift.


“We plan to still live at the house until the day we die and so, do we still need to pay the taxes? Is therea way to nullify the transaction? Does drafting a living estate help in anyway?”============>As said above;UNLESS the total FMV of th e pty(or other gifts you made before, I mean any gift exceeding $13K or 2012, $12K 2010 or etc) exceeds $5.12 Million for 2012, $5.25 million for 2013 then, you do NOT need to pay the gift tax to the IRS. None of the states in the US imposes a gift tax similar to the federal gift tax. Additionally, no state treats gift money received as income to the recipient. Therefore, the recipient of a gift never has to worry about paying state taxes on the money received.I guess most of state ipose either estate or inheritance tax to their residnets.You can contact Dept of Rev of yur state for more info in detail.

Thanks for replying to my message and giving me info about it. I have read through it and I just want to make sure that I am on the right track of what you're saying. Please correct me if I am wrong.

So I do not have to pay the recaptured depreciation because it is not disposed of? But I thought that it was disposed of by selling it to my son for a $1. In the deed, it says that I sold it to him for $1. Actually, it's to him and my daughter. But it's still a $1 sold to them. If they never sell it in their lifetime, they don't have to pay the taxes related to the recaptured depreciation?

So my husband and I definitely did not exceed the $5.12M in 2012. So we do not owe any gift taxes? It's not actually a gift right because it says "sale of my property to my kids" on the deed and documents. So it's a transfer of property?... Do we have to draft something like a document to say that it is a lifetime gift?

“So I do not have to pay the recaptured depreciation because it is not disposed of? “======>As mentioned previously, as long as it is a gift, you do not need to capture the unrecap depre taken previously. Your original basis ‘d be your child’s basis for depre. For tax purposes, a gift is a transfer of property for less than its full value. In other words, if you aren't paid back, at least not fully, it's a gift.Even if it is considered to be a part sale, you actually do not need to pay recap depre tax since you sold it at a LOSS, NOT LTCG.
“But I thought that it was disposed of by selling it to my son for a $1. In the deed, it says that I sold it to him for $1. Actually, it's to him and my daughter. But it's still a $1 sold to them. “=========>This will be deemed a part gift, part sale.So, It will be deemed a gift of $99,999; If I assume that the basis of the home was $100K and you sold it for $1.Parents wishing to give a child their property as a gift need to transfer ownership to the child. Since you didn’t sell it for FMV there will probably be a Federal Gift Tax due on the amount of equity you have in the property (or at least the amount of equity above the Gift Tax Limit for your child). the IRS will call it a gift and tax you accordingly. If you sell it at FMV, there may be a Capital Gains Tax due. (I don’t know anything about your state taxes but there may well be state tax liability as well).

“ If they never sell it in their lifetime, they don't have to pay the taxes related to the recaptured depreciation?”========>Correct;your chidren’d pay the taxes related to the recap depre when they ONLY DISPOSE of it in the future. But suppose your children are planning to sell it at a later date. If they sell it after two years, capital gains tax might not be too much of a problem depending, of course, on the value of your property.

“So my husband and I definitely did not exceed the $5.12M in 2012. So we do not owe any gift taxes?”=======>No.However, I guesss the actual FMV of the home exceeds $$26K, both of you need to file Form 709. Unless the house is very valuable, you wouldn't owe federal tax.
“ It's not actually a gift right because it says "sale of my property to my kids" on the deed and documents. So it's a transfer of property?... “=============>This will be deemed a part gift, part sale. It will be deemed a gift of $99,999; If I assume that the basis of the home was $100K and you sold it for $1; as said , if you want to sell your home to a xhild for a dollar, there’s no legal reason for you not to do it; however, since this is not considered an ARM’S LENGTH transaction, the transfer for this small amount could be subjected to GIFT TAX rules. In other words, since the FMV of your home has to be more than $1, as far the IRS is concerned, you just gifted your family member your home. This means that you need to pay gift tax on the FMV(except $2 for your children) of your home. In general, any transfer for less than FMV to an individual is a gift. For example, if the residence being gifted is valued by a real estate appraiser to be $100K, and the residence is sold to as child for $1; there will be a transfer subject to gift tax of $99.9K.

“Do we have to draft something like a document to say that it is a lifetime gift?”==========>I guess so; you can use Form 709 reporting transfers subject to the federal gift and certain generation-skipping transfer (GST) taxes and to figure the tax due, if any, on
those transfers, and Allocation of the lifetime GST exemption to property transferred during
the transferor's lifetime.Exemption from gift taxes is the lifetime amount that you can gift away without incurring any federal gift tax. Nonetheless, any lifetime gift tax exemption used will reduce the estate tax exemption of the person making the gift.
I guess yo can contact the IRS for more info on your issue.

I think you must have to pay that tax even you sell that on $1.So you must consult with an experienced lawyer that will help you more for getting the better solution for your tax problem.