What is the capital gains tax on this donation?

Asked by Ruth

May 21, 2010 at 6:20 p.m.

Richard,

my mother-in-law passed away, but before that she put her house in my husband’s name. How much do we have to pay in capital gains tax?

Answer: Ruth – My answer is based on the information you provided.

It appears that by selling the house, your late mother-in-law gifted the house to your husband and until the property is sold there is no tax impact or reporting requirement on your personal income tax return.

When the property is sold, you and your husband will need to know the fair market value of the house on the date of your mother-in-law’s death, its cost or the basis of the property on the date of her death and the amount, if any. applicable, of any gift tax paid.

These numbers are used to determine the basis that you and your husband will use to calculate the gain or loss on the sale.

They are also used to help determine the holding period (how long you are considered to own the property). The holding period determines the treatment of short-term or long-term capital gains income.

IRS Publication 551, Asset base, covers the issue of basis or cost. A part is included below:

Property
Received as a gift

To determine the basis of an asset you receive as a gift, you need to know its adjusted basis (as defined above) to the donor just before it was given to you, its FMV at the time it was given to you, and any tax on the donations paid on this.

FMV less than
Adjusted Donor Base

If the FMV of the property at the time of the gift is less than the donor’s adjusted basis, your basis depends on whether you realize a gain or a loss when you dispose of the property. Your basis for calculating gain is the same as the donor’s adjusted basis plus or minus any adjustments required to the basis while you owned the property. Your basis for determining the loss is its FMV when you received the gift plus or minus any required adjustments to the basis while you owned the property (see Adjusted base, earlier).

If you use the donor’s adjusted basis to calculate a gain and get a loss, then use FMV to calculate a loss and get a gain, you have no gain or loss on the sale or disposition of the property.

Example.

You received an acre of land as a gift. At the time of the donation, the land had a FMV of $8,000. The donor’s adjusted base was $10,000. After receiving the land, no events occurred to raise or lower your base. If you sell the land for $12,000, you will have a gain of $2,000 because you must use the donor’s adjusted basis ($10,000) at the time of the gift as the basis for calculating the gain. If you sell the land for $7,000, you will incur a loss of $1,000 because you must use the FMV ($8,000) at the time of the gift as the basis for calculating a loss.

If the sale price is between $8,000 and $10,000, you have no gain or loss. For example, if the sale price was $9,000 and you tried to calculate a gain using the donor’s adjusted basis ($10,000), you would get a loss of $1,000. If you then try to calculate a loss using FMV ($8,000), you will get a gain of $1,000.

Commercial property. If you hold the gift as business property, your basis for calculating any depreciation, depletion, or amortization is the same as the donor’s adjusted basis plus or minus any necessary adjustments to the basis while you hold the property. .

FMV equal to or greater than
Adjusted Donor Base

If the asset’s FMV is equal to or greater than the donor’s adjusted base, your base is the donor’s adjusted base at the time you received the gift. Increase your tax base by all or part of any gift tax paid, depending on the date of the gift.

In addition, to calculate the gain or loss from a sale or other disposition of property, or to calculate deductions for depreciation, depletion, or amortization on business property, you must increase or decrease your all necessary adjustments to the base while you owned the property. See Adjusted base, earlier.

Donation received before 1977. If you received a gift before 1977, increase your base in the gift (the donor’s adjusted base) by any gift tax paid on it. However, do not increase your base beyond the gift’s FMV at the time it was given to you.

Example 1.

You were given a house in 1976 with a FMV of $21,000. The donor’s adjusted base was $20,000. The donor paid a gift tax of $500. Your base is $20,500, adjusted donor base plus gift tax paid.

Example 2.

If, in Example 1, the gift tax paid had been $1,500, your base would be $21,000. This is the adjusted donor’s basis plus the gift tax paid, limited to the FMV of the home at the time you received the gift.

Gift received after 1976. If you received a gift after 1976, increase your gift base (the adjusted donor base) by the portion of the gift tax paid on it that is due to the net increase in the value of the gift. Calculate the increase by multiplying the gift tax paid by a fraction. The numerator of the fraction is the net increase in the value of the gift and the denominator is the amount of the gift.
The net increase in the value of the gift is equal to the FMV of the gift less the donor’s adjusted basis. The amount of the gift is its value for gift tax purposes less any annual exclusions and spousal or charitable deductions that apply to the gift. For more information on gift tax, see Publication 950, Introduction to inheritance and gift tax.

Example.

In 2002, you received property from your mother with a FMV of $50,000. His adjusted base was $20,000. The amount of the donation for gift tax purposes was $39,000 ($50,000 less the annual exclusion of $11,000). She paid a gift tax of $9,000. Your base, $26,930, is calculated as follows:

Fair market value $50,000
Less: Base adjusted 20,000
Net increase in value $30,000
Gift duties paid $9,000
Multiplied by ($30,000 ÷ $39,000) .77
Gift tax due to net increase in value $6,930
Adjusted base of ownership to your mother 20,000
Your base in the property $26,930

IRS Publication 544, Sales and Other Disposals of Assets, explains holding periods and how to calculate capital gain or loss.

If your holding period is 1 year or less, any gain on the sale is considered a short-term capital gain and is taxed as ordinary income. If your holding period is longer than one year, any gain on the sale is considered a long-term capital gain and taxed at the capital gains tax rate.

Both publications are available on the IRS website, www.irs.gov.

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