Tax liabilty Quesiton - maximize profit

General Real Estate Investing
1

My Parents own a gulf front lot (raw land) in Florida. They bought it for $22,000 in 1974. My parents are now divorced and have listed the property for $399,000. They are giving us kids the proceeds.

Kids:
Me (married w/ 2children) Household Income 100,000
Brother (married w/ 2children) household income 180,000
Sister (child only) household income $80,000

How can we get the most money out of the deal?

Right now the plan is for my parents to pay long term tax (15% i think) and give us the difference. THey can either gift a portion and we can pay tax on the rest, or do something else.

Is it better for us to quit claim the land into our names? We think it will sell in a month, b/c we listed it at $150,000 below market value due to my dad leaving the country for good.

I would appreciate any creative avenues that we can take.

thanks

2

if they sell, they’re going to have to pay the LTgain tax. what you have to avoid are gift taxes when they give you the proceeds.

fortunately, this is not difficult

step 1. have them put some in a roth or education IRA for the kids. this is easy, good future planning and avoids all kinds of hassles. Roth IRA’s pass to heirs tax free as do the education IRAs.

step 2. each of your parents can give each of you, including grandkids up to $11,000 a year tax free. (I’m sure this limit has changed, I’m not up-to-date). That’s $88,000 to your family this year. [11 from each parent = 22k to each of you = 88k]. sis gets screwed a little in this scenario as she can only get $22k since she has no spouse or kids. but they can do this EVERY year to catch her up. Is she looking for a husband? Is she cute? Nevermind.

step 3. if you don’t want to go multiple years to get the cash, you can take it all in year 1. You will have to file a form 709 for the gift tax, BUT you can offset the tax against your lifetime unified credit of $340,000. In other words, until the tax is over $340,000 EACH, you’ll pay nothing. Note that the unified credit is a lifetime limit, so every dollar you take today reduces amounts you have to use against future gifts taxes. that’s usually not a problem.

OR

they can gift it to you now, you take the gift at market value, avoid gift taxes as above. sell it at your gifted value and avoid cap gains taxes to boot. I like this plan now that I think about it.

personally, I’d get Dad to do a power of atty to one of you and hold out for the extra $150k to market value.

I know this is probably confusing as it’s hard to explain. short answer is don’t worry about the gift taxes. pick up form 709 and publication 950 from irs.ustreas.gov.

meanwhile I’ll think on the 2nd gifting strategy to make sure it’s airtight.

3

Mark,

I have a couple of questions concerning your strategy, in that my understanding of the gift taxes and cost basis to the donees does not correlate with your proposal.

First, I understood that gift taxes (if due) were only paid by the donor, not by the recipient. Gift taxes are due only when the total lifetime taxable gifts by that donor to all recipients exceeds their unified credit. Until, then the donor only files an informational Gift Tax Return with the IRS for gift amounts that exceed the annual gift tax exclusion. The tax free exclusion for gifts was increased to $12K this year.

As I understand it, there is no immediate tax impact upon the recipient of a gift and the recipient is not required to file a Gift Tax Return for gifts received.

Second, I understood that the gift passes to the recipients at the donors cost basis. Since the parents’ cost basis in the property in question is only $22K, this basis would be shared equally by all three children, assuming each child received a 1/3 share.

To get the most money out of the deal, the parents should deed the property to an irrevocable trust making each child an equal beneficiary. At the parents’ death, the children inherit at the property’s stepped up basis. No capital gains due if sold at the property’s new basis.

If the parents don’t want to wait for the children to receive the property by inheritance, then selling now will incur the long term capital gain AND subject the parents to AMT. The after tax proceeds can be distributed to each child in $12K annual increments from each parent (for a combined tax fee gift of $24K oer year to each child) to avoid the need for a Gift Tax Return, or they may choose a single lump sum gift since no actual Gift Tax is likely to be due.

You lost me on how to implement the IRA approach. Assuming that the parents are still receiving earned income, isn’t the annual contribution to an IRA limited to something like $4K or $5K after age 50? If there is no earned income, then there can’t be any IRA contribution, right?

4

what does the rule say about gifting.

Since my parents own the propertey together, and are divorced, can’t each one them gift $12,000.

can they each gift 12k to me, my wife, and my 2 kids= $96,000???

of course they will pay LT capital gains, but we’re ok with that. We do not want to wait until death to recieve the money.

5

property gifts are at market value.

southpaw is correct on the 96k. per year. even if they were married, they can gift seperately.

as long as you’re under this limit, you won’t even need to file the 709. be sure to get a letter from them specifying who they are gifting how much and separate checks.

6

Clarification:

Gift of property is made at market value. Donor files Gift Tax Return and uses the market value of the property as the value of the gift when filing a Gift Tax Return.

Recipient does not have to report the gift to the IRS nor pay gift or income tax on its value. Since the FMV of the property under discussion is greater than the donor’s adjusted cost basis, the recipient’s cost basis is the donor’s cost basis. When the recipient sells the property, the recipient’s taxable gain is computed from the donor’s adjusted cost basis

However, this is all academic, since Southpaw wants the parents to sell the property, pay the taxes, then divide the sale proceeds among the children. Maybe a better after tax result can be achieved if the parents transfer title to the property in equal shares to the three children directly. When the children sell the property, each share of the sale profit is taxed as a long term capital gain but the AMT impact upon each child might not be quite as severe as the AMT impact upon the parents.

Additionally, since the children would have title to the property and can afford to wait for a sale, they don’t have to discount the property by $150K to get a quick sale.

7

Wouldn’t we pay short-term gains tax if we transfer into our names. We want to sell it soon. we don’t care about the $150,000 being left on the table. We could get 150k more, but Florida Real Estate, is not what it was last year. If we wait a year or 2, we might not get 150,000. Plus with the hurricanes, we just want ot cash out now.

Could you give me a estimate take home cut, if we use the gift route?

Also i want to make sur ethis is correct - my parents can gift to my wife, even though she’s not blood related?

thanks

8

they can gift to anyone, related or not.

more later.

9

No, if your parents gift you and your siblings the property, their holding period tacks on to yours. Long term capital gain when you sell.

we don't care about the $150,000 being left on the table. We could get 150k more, but Florida Real Estate, is not what it was last year. If we wait a year or 2, we might not get 150,000. Plus with the hurricanes, we just want ot cash out now.

You started this thread by challenging us with the question “How can we get the most money out of the deal?” All I tried to do was show you that letting your parents sell the property at their higher tax rate after AMT leaves less after tax sale proceeds on the table.

Additionally, you told us that there was some urgency to accomplish a quick sale because your father is leaving the country, hence the large discount. If your parents gift the property to you and your siblings, the urgency for a quick sale is removed, and therefore you don’t have to discount the price quite so much. You never suggested that you had some compelling circumstances that dictated a quick sale, too. Remember you asked how to get the most money out of the deal.

furthermore, no one suggested that you had to wait two years to sell. I don’t know where that came from. I suspect you could get a better price if you waited a little longer than one month for a buyer willing to pay a higher price. You might even get a sale just as quickly without discounting so much. You don’t have to let your urgency to get the money in your hands force you to give the property away. List at a smaller discount to encourage offers. If they don’t come quickly enough to please you, lower your price gradually.

You will have to explain what hurricane season has to do with this. The property is unimproved land, right? You shouldn’t have any hurricane damage to deal with or devalue the propety.

Could you give me a estimate take home cut, if we use the gift route?

No, at least not very accurately. We can tell you that your 1/3 cut before taxes is 1/3 of whatever you net from the sale of the property after selling costs. If you and your siblings sell for $460K and net $420K after selling costs, then your 1/3 cut would be $140K. Your own tax advisor with full knowledge of your complete financial picture, your other taxable income, and the AMT impact upon your tax liability should be able to estimate your after tax income from the sale.

10

thanks for everyones help.

Hurricanes create errosion. Hurricanes can also create more beach front, but i don’t want to take any chances. Plus everytime Hurricane season comes by People think twice about building on the water in florida. Basicaly Beach Front Real Estate doesn’t sell quite well in Hurricane season.

I really appreciate everyones help,

11

Hurricane season started on June 1 and won’t be over until November.