My client is selling land that was gifted to him by his father 15 years ago. Should he put inherited or gifted on the Sch D? see details

[utah-arizona-taxlady]

The issue is that the father never filed (as far as it is known, he has passed away about 7 years ago) a 709 gift tax return. Each child (3 of them) will be selling for a gross cost of approx $100,000 each.  Is this going to open up a can of worms with the IRS if it is put down as gifted?  Side note, the father inherited it from his mother 15 years ago just before he gifted it to his 3 children, so I assume the cost basis will be the FMV on the mothers/grandmother's date of death?  The other caveat is that the Deed of Distribution by the father was prepared and notarized and given to the county about 7 years ago but it was never recorded (for whatever reason) into the children's names.  They are in the process of doing that now.  The property has been sitting empty all these years but the property taxes have been paid.  What a mess! 

[IRonMaN · Accepted solution]

Enter the date it was acquired by the kids, enter the date it was sold, and enter the cost as the value on the date of death of grandma.  You don't need to indicate whether it was gifted, inherited, or dropped off by aliens.  The IRS lost their can opener so there isn't going to be an opening of any can of worms with the IRS.  

[utah-arizona-taxlady]

Thank you IRonMaN!  I knew you would not only know the correct answer for this but you would also leave me with a smile on my face!  Thank you so much for the answer and the quick reply.  You are the best!

[IRonMaN]

Smiles are always free here 😁

[PATAX]

@IRonMaN @utah-arizona-taxlady Iron Man hit a grand slam out of the park on that one and no further comments are necessary...

[IRonMaN]

But I was only trying to lay down a bunt.  I guess I messed that one up. ⚾

[abctax55]

"...so I assume the cost basis will be the FMV  (my emphasis) on the mothers/grandmother's date of death?"

oops....disregard my comment below. Read too fast....  Dad inherited, so FMV is correct.

That's not correct, his basis would be HER cost if she GIFTED it to him.  And if he then gifted it to his kids, that same cost basis is used.

[PATAX]

@IRonMaN you must have been using Herman Munster's baseball bat to lay down that bunt...

[utah-arizona-taxlady]

Thanks for trying abctax55!  Yes, he inherited the property on her death.

[Taxes-by-Rocky]

I'm by no means an attorney but isn't a "deed of distribution" the means/mechanism of transfer of title in a probate process (i.e., dad's probate process or grandma's - wasn't clear - title problem)?  If from dad's estate, would that mean FMV on dad's DOD?

[utah-arizona-taxlady]

Yes, Arizona probate court is now on it.  It will be Grandma's probate according to Arizona.  It is a real mess but the client and family are working through it, they will get an attorney if needed.

[BobKamman]

Trying to figure out how a probate court would be involved here.  My guess is that the father was PR for his mother's estate, so the deed shows him as PR of the estate deeding it to himself as beneficiary.  Then he did not deed it to the kids.  So it is still in father's estate?  Then the basis would be FMV at the time of his death, not his mother's.  

[utah-arizona-taxlady]

Hmmmm....something to think about here.  I will ask my client about this.  Since dad died several years later the FMV on his date of death would be more beneficial to them.