Managing Money : How IRS Views Gifts of Real Estate
QUESTION: Recently you said that shares of stock given as a gift to another carry as the tax basis the original price, plus brokerage fees, paid by the giver. Does this same principal apply to commercial and residential real estate?--P. R. K.
ANSWER: Our tax experts say yes, the general principal still applies. However, the issue is too complicated to leave it with such a simple answer.
To begin with, let’s review the rules governing taxes and gifts. One individual may give another individual $10,000--or property worth $10,000--every year with neither donor nor recipient having to pay tax on the gift. With stock, jewels and certainly cash, it’s easy to limit a gift to $10,000. Not so with most real estate, particularly in Southern California, unless it’s undeveloped acreage. You can get around this if the recipient pays a gift tax. Or the donor could give a partial interest in the real estate each year for several years. But this method can get very involved.
Another potentially complicating factor is whether the recipient is getting real estate that is free of any mortgage or if he is assuming the debt obligations of the donor. Obviously, the assumption of debt reduces the value of the gift.
However, in general, says Bruce S. Ross, an estate planning attorney with the Los Angeles office of Morrison & Foerster, the recipient’s tax basis is the donor’s tax basis, plus any gift tax paid by the donor on any appreciation of the real estate while it was owned by the donor. The recipient does not get any credit for gift tax paid by the donor on the historical cost of the property. The law applies equally to residential and commercial real estate. (The tax basis is used to determine the amount of tax owed when the property is sold. The basis is subtracted from the sales price to calculate the taxable gain.)
Ross adds that if the donor gives property that has declined in value since he purchased it, the recipient’s basis is still the donor’s original purchase price. The only exception to this rule would be a case in which the recipient sold the property for less than it was even worth at the time he received it. In this case--which you might imaging occuring in a truly real estate-depressed town--the recipient’s tax basis on the property is its value at the time he received it.
If you have any doubts or questions about this subject, consult a competent accountant or tax attorney for a thorough review of the laws and how they apply to your specific situation.
Q: I am 75 years old and am currently working. I have accumulated about $20,000 in my 401(k) tax-deferred savings account with the company. If I retire now, can I roll over that amount into another tax-deferred account, or do I have to pay taxes on the full amount?--R. S.
A: Basically, our experts say you may roll the $20,000 in your 401(k) account into a tax-deferred individual retirement account without paying taxes on your 401(k) nest egg. But because you are 75--well past the mandatory age for taking the minimum distribution from IRAs and other tax-deferred accounts--you must take a minimum distribution from this $20,000 account before rolling it over into an IRA.
Still, the minimum distribution you are required to take shouldn’t pose much of a problem. According to our experts, if you have no beneficiaries on your IRA, you are required to withdraw--and pay taxes on--a minimum of $1,600 when you roll over your 401(k) funds into an IRA. Next year, and in all subsequent years, you will also be required to take a minimum distribution.
A few additional words on financial planners. In a recent column, we urged readers to be especially careful when selecting a financial planner because virtually anyone can claim to be one, and the field is not regulated by any government agency. A recent report by the North American Securities Administrators Assn. underscores this advice.
According to the group’s report, more than 22,000 investors lost $400 million as a result of fraud and abuse by financial planners in the past two years. The losses and extent of the abuse were substantially higher than those uncovered in a comparable study in 1985 that reported losses of $91 million.
The “most disturbing” portion of the report, the group said, is the apparent trend toward “big ticket” swindles involving losses in the range of $10 million. The group said the “financial planning mega-scams” occurred in New York, Illinois, Missouri, Washington and Oregon.
The report urges consumers to inquire about a planner’s experience, professional background and references, and it says the most important question an individual can ask a prospective financial planner is: “How will you make money on my plan?”
