How to correct the basis of a rental

[LARRYLIFE]

My client was gifted a rental by his father 2021.  And shortly after that he sold the property.  His father had gone thru two Like Kind Exchanges.  I reviewed his fathers pertinent tax returns and they looked  incorrect to me.  So I redid recalculated the like kind exchanges and found out the current adjusted basis is higher by over $200,000.  Also there was approximately $10k more than It should be.  Also there should have been an additional $9k in recognized gain in 201 on the second Like Kind Exchange.  What is the best way to to correct this situation.  I'm I required to amend the additional capital gain though is beyond the SOL.  The father was in the 15%tax bracket in 2017 so there wouldn't be any additional tax.  Is it possible to make the changes as part of the sales of the rental on the son's return?

[sjrcpa]

"shortly after that he sold the property"

How shortly after?

Has the incorrect basis been used on prior tax returns of the seller client? I'll answer my own  questions (Hi squirrel) since I  see  you said the gift was in 2021. Seller should report the correct basis on his 2021 return.

Are you preparing the father's 2021 gift tax return? This should also show the correct basis.

You are required to inform your client of the errors. It is up to them if they amend.

Are you sure the basis is off by $200K? Father has been shorted on depreciation expense if that is the case.  And allowed or allowable depreciation is  a basis reducing factor.

Are you the one responsible for the errors?

[abctax55]

1) Fix the typos so the details are clear.

2) Research Form 3115

[abctax55]

(Hi squirrel)   😢

Wow - two references today to our departed colleagues.

[TaxGuyBill]

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@LARRYLIFE wrote:

My client was gifted a rental by his father 2021.  And shortly after that he sold the property.  

Also there should have been an additional $9k in recognized gain in 201 on the second Like Kind Exchange.  ... The father was in the 15%tax bracket in 2017 so there wouldn't be any additional tax. 

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This is not your question, but a couple of things to consider:

(1) Why did the father gift the rental and then the son sold it right away?  Did the son keep the proceeds?

(2) If I remember correctly, I think the Unrecaptured Section 1250 gain is the first part that is taken for the recognized gain.  So it should have been taxed at his regular tax rate (15%???).

But as was mentioned, for reporting the sale, you use the actual Adjusted Basis.  It does not matter if errors were made before, you need to calculate the correct amounts.  That includes the prior depreciation that SHOULD have been taken, if they did not take enough if they had properly done things.

[abctax55]

I was just about to page you, Bill.  

Thx

[LARRYLIFE]

I was  not make the tax preparer who made the errors.  When I have the father correct the adjusted basis and complete a form 3115 should I complete a Form 8275 and disclose why I adjusted the basis of the rental.   

[TaxGuyBill]

The wrong Basis seems to just be a mathematical or posting error.  No need for a 3115 or a 8275 for that.

[BobKamman]

I vote for substance over form.  Put the transaction on the father's 2021 return.  Did he really think he could get away with this?

[TaxGuyBill]

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@BobKamman wrote:

I vote for substance over form.  Put the transaction on the father's 2021 return.  Did he really think he could get away with this?

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If the son kept the proceeds, it would properly be reported on the son's return.  But that is why I asked my first question above.

[LARRYLIFE]

He was savvy in terms of the rental, but not knowledgeable about taxes.  All he knew was a "Like Kind Exchange means no current taxes due."

[BobKamman]

Who kept the money is probative, not dispositive.  What if father wrote daughter a check for $200,000 the same day he deeded son the real estate worth $200,000 after taxes?  What if he had been making such gifts every year for the last five years?  What if father lived with son, benefited from his large household staff and could drive the Lamborghini on weekends?  If this were a salary bonus, "assignment of income" wouldn't care who cashed the check or kept the funds.  It's somewhat more complicated when property is involved -- you have to look at all the facts and circumstances.