Dad's Real Estate Gift To Son Raises Red Flag

Dad's real estate gift to son raises red flag

By Bob Bruss

October 03, 2007

Editor's note: Robert Bruss passed away on Sept. 26, 2007. This was one of the last real estate columns he wrote. Inman News is publishing Bob's last work as a final salute to the nation's most well-known real estate writer.

DEAR BOB: In 1995, I acquired a residential rental property through an Internal Revenue Code 1031 tax-deferred exchange. In 2000, I gave the property to my son and his wife for use as their principal residence. I filed a federal gift tax return for fair market value in 2000. My son and his wife have continually occupied the house for the past seven years. Do they qualify for the $500,000 principal-residence-sale exclusion and what is their cost basis for this property gift? --Melvin F.

DEAR MELVIN: Thanks to Internal Revenue Code 121, if your son and daughter-in-law owned and occupied the property as their principal residence at least 24 of the last 60 months before its sale, then they can claim up to $500,000 tax-free capital gains (up to $250,000 for a single home seller).

However, because the property was a gift, as the donees they took over your (presumably low) adjusted cost basis at the time of the gift. They did not acquire the property at its probably much higher market value on the gift date.

This is a major disadvantage of a realty gift, namely the donee takes over the donor's adjusted cost basis. For more details, they should consult their tax adviser.

The new Robert Bruss special report, "How to Profit from Lease-Options (Rent to Own) If You are a Property Buyer, Seller, or Realty Agent," is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his Real Estate Center).