Tax Guru – Ker$tetter Letter

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Selling gifted property

Posted by taxguru on January 14, 2008

Q:

Subject: Tax Question

 

Kerry,

First, thanks for your blog.  You’re a great resource for all of us out there.  I have a question regarding some gifted property- I’m grasping at straws at this point, but I’m hoping that you can help:

First, my wife and I live in California and make ~$150K/year.  We just bought our first house and we have no children.  Just in case these detail help.

 Now to our “problem” – in Nov. 2005, my wife’s parents gifted us a piece of land worth ~$700K on which to build a home.  This is bare land, purchased in ~1978, and has a basis of ~$10K.   After spending ~$60K on permits, engineering, and architecture we decided against building a home on the land.  We’re now planning to sell the land and we’re trying to minimize our tax exposure.

 I think that we did this in the worst possible way, as I think we’re going to take the cap. gain hit on the delta between my in-laws’ basis and the sales price (minus our expenses) and my in-laws estate will be hit for the full $700K against their $2M of tax free estate (yes, they’re likely to exceed that $2M).  Other than a 1031, is there any way to minimize either the taxes or the amount counted toward my in-laws estate?  Are there creative ways to minimize the state or federal tax exposure?  Is there anything that would allow us to invest any/all of this money in a tax-free retirement account?  I know that I’m grasping at straws.

 Is there anything we can do????

 Thanks,

A:

If you have been reading my stuff for any length of time, you should know that you need to be working directly with a professional tax advisor to ensure that you do things properly.

You do have a bit of a messy situation here in regard to the built in capital gain you accepted from your in-laws.

You do really need to review various scenarios with a tax pro to see if any of them could assist. 

A 1031 exchange could possibly be appropriate if you can make the case that the old property was used for investment and not personal purposes.  You would then have to work with an exchange accommodator to use the proceeds to acquire new business or investment real estate; not personal use property.

I’m a little confused by your wording as to the status of your in-laws.  Are they still alive or have they passed away?  Another option that you may want to explore if they are still alive is to give the property back to them and possibly have them sell the property to you rather than gift it.  That could get messy; so their professional tax advisor would definitely need to be in on those discussions.  There are special tax breaks for them and you if they were to sell the property to you on the installment basis (carryback note) and then have that note as part of their estate after they pass away.

If you do sell the property, another way to spread the tax bite out is to carry back as much of the price as you can so that taxes can be spread out over the years in which you collect the payments.

These are just a few of the issues that you all need to discuss with your own professional tax advisors.

Good luck.

Kerry Kerstetter

 

 

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