Selling Gifted Property
Subject: Re: may I have your enlightened advice?
Dear Mr. Kerstetter,
My accountant recommended I contact you.
My stepmother gave me her house last year as a gift. She built it in 1968. I am her executrix.
How do I establish the basis for the house?
She didn't file a 709 gift tax return last year when she gave it to me so I will need a basis for her estate to pay those late taxes.
Then do I use that same basis for paying the 706 gift tax return this year?
Thank you so much.
Subject: Re: Is gift property to be included at death in one's estate?Dear Tax Guru,My stepmother gave me her house (worth over 1Million dollars) as a gift in 2007. She died in October 2008. Is that property considered part of her estate?Are there any gift taxes owing at the time of death for that property or just the 709 gift tax return when she gave me the gift?Thank you
I'll cover both of your recent emails here since they are basically dealing with the same issues.
First off, it is obvious that you need to be working with experienced and up to date professional tax and legal advisors to make sure you do things properly here. As executrix, you should be aware of the potential personal liability you face if the Gift and Estate tax returns aren't prepared properly and filed with IRS. A very high percentage of these tax returns are audited by IRS; so they will be looking to you to cover any deficiency they find.
Both Gift and Estate taxes are calculated based on the fair market values of the assets at the time of the gift and of death. The original basis of assets transfered is generally only important for the recipients of gifts, who have to use the carryover basis as their own.
The gift of the home to you should have been reported on a 709 Gift Tax return. Since the value of that gift alone was more than the million dollar lifetime exclusion, there will definitely be some gift tax due for that gift. Before being able to properly prepare that 709, you will need to find out about other gifts made during your stepmother's lifetime because all or part of that million dollar lifetime exclusion may have already been used up.
The 706 Estate Tax return is one of the most time consuming tax returns to work on. It is quite possible that part of the value of the home that was given to you, plus the gift tax that was required to be paid on it, will be included in the inventory of assets she owned as part of her taxable estate. Again, an experienced professional tax advisor will be able to help you with this.
From your perspective, you do need to do some more homework to establish a carryover cost basis of the home that you can use when you either sell it or convert it to business or rental usage. I'm assuming there are no records of what your stepmother paid for the home; so you will need to reconstruct the costs that were put into the house. Using photos or whatever you can come up with, do your best to document the history of the house, starting with the purchase of the land and use estimates of the costs that would have been incurred for the construction and the major capital improvements. You have to use your best estimate of the actual dollars spent in those earlier years. There is no adjustment allowed for inflation. Again, an experienced professional tax advisor can help you compile those costs and will prod you with questions about costs that you can't think of on your own.
Depending on your stepmother's personal history, there may also be other factors to consider, such as whether she inherited a share of the home from a spouse and if the state is community property or not. That would give rise to a step up in the cost basis of all or part of the home.
I hope this helps.
Dear Mr. Kerstetter,
Thank you so much for your advice. The house my stepmother gave me in September 2007 is in Portugal. In 1968 she and my father bought some land there (they both were US citizens) and built the house in question. The house and land were in his name. He willed all of it to my stepmother in 1997. There have been no upgrades or improvements since that time.
Should I contact the IRS to find out about any possible gift exclusions she might have had during her life? I don't know any other way.
Are you saying that MY BASIS FOR CAPITAL GAINS TAX when I sell is NOT the fair market value at the time of the gift but on what she spent to buy the land and build the house 40 years ago?
I have an accountant here in California and I have my American attorney in Portugal. He specializes in international inheritance law and said that he could help me fill out the 709 form. I think I should trust him. He is very experienced.
Thank you very much for your valuable time and information.
If you don’t have access to your stepmother’s professional tax advisor for copies of the gift tax returns, you can try submitting Form 4506 to IRS along with their $57 fee in order to get a copy of what they have. See this page on the IRS website for more info.
Your starting basis of items received as gifts is the same as it was for the person who gave it to you. If the home’s value was much higher than that, you also accepted responsibility for the capital gain taxes on the difference when you received the gift.
I mean no offense to your current professional tax advisor, but if he doesn't now this very basic principle of taxation in the USA, I would be very worried about the depth of his skills in handling your other tax matters.
However, it’s your call; so good luck.