Client gave son money to buy property

[Terry53029]

Client gave his son $400,000 to buy property, with the condition (only with a handshake) that son would transfer property to my client at a later date. At the time my client could not go out of town to do paperwork of buying property, and to get the property, it had to be bought right away was the reason for son putting it in his name. They had planned on doing the transfer in a month or so, which turned out to be about two plus years later. My thinking is no 709 is due by my client as there were conditions on the money he gave to son (even if not in writing) Now the plot thickens 🙂 Son rented said property, and filed schedule E in 2017 and 2018. In November 2019 title was put in my clients name, and he wants to continue to rent it. My thinking is my clients basis will be $400000, because that is the amount paid for the property in 2017, am i correct in my thinking about the 709 and basis.  

[itonewbie · Accepted solution]

It is well established by case law that legal title is not necessarily the controlling factor when other facts support that it does not have the full effect of economic incidents of ownership.

For gift tax purposes, it is held that the transferor's intention is the controlling factor.  In the absence of any paperwork, your client should be ready to prove that intention by some other means.  Re-titling of the property in November for no consideration, monetary or otherwise, could work in your client's favor.

This is not to say that there is a complete lack of gift with your client's arrangement.  For example, consistent with the position on gift tax, his son should only be a nominee recipient.  If the son got to retain the profit, that could constitute a gift.

Your client should be able to prove that he has been carrying the burden of ownership to protect his economic interest throughout these years - that may include financial outlays, administration, or at least some level of oversight of the activities carried out by the son, etc.

As explained by my friends, the basis for depreciation would be the lesser of FMV or adjusted basis when the property was placed in service.

For capital gain purposes, however, the cost basis would be $400k, adjusted for capital improvements and depreciation.

[Terry53029]

Thanks everyone for your advice, especially you Itonewbie, you always give such elegant and complete answers. Ironman although not as elegant gives good,short, and to the point answers. again thanks to all

[IRonMaN]

I watched a lot of Dragnet as a kid - just the facts :smile:

[itonewbie]

Glad we've been helpful, @Terry53029. Have a great weekend!

[abctax55]

Jensen gets paid by the word.  Jeff, having been around here longer, no longer gets paid by the word so he keeps his answers short.  <$> (did I get it right this time?)

[itonewbie]

No, you need to start and end the <$>cynical font</$> with these.

I get paid by the word at $0.  It's a lucrative business and helps especially during off season.

[poolcleaner]

Does this come under the category of an "incomplete gift" up until the client takes over ownership?  This would mean no 709 until the client took over the  property.

[IRonMaN]

Sounds like a basis of 400,000 less depreciation taken to date.

[TaxMonkey]

The fact that you client gave $400k, doesn't mean that it was spent on the property.  What if the property was $375k and the kid pocketed the rest.  Or conversely what if the kid kicked in $10k of his own money.

The properties basis is the lower of current FMV or the original purchase price plus improvements less depreciation.