Sale of principal residence received as a Gift from a parent

[PPECPA]

Friends, Romans, Countrymen (and women) ...lend me your ears....

So I have a client who received a received as a gift, a principal residence from his parents.  Shortly thereafter (2 months later)  my client sold the property and purchased another home.  As the client did not live in the home or own it for 24 months, he does not meet the eligibility test and therefore cannot take the gain exclusion. 

At this time I am trying to determine the gain on the sale of the gifted property.  To do this I need to determine the basis.  Is the basis the FMV at the date of Gift/transfer, the appraisal value, or the parents original basis?

Much thanks for your help on this guys!

PPECPA   

[BobKamman]

The basis of a gift is the basis of the donor (the parents).  The daughter gets their holding period, too.  

[PPECPA]

Thanks Bob!

You've provided responses before and I appreciate it.  If the holding period is the same as the parents, and the parents owned the property for 25 years, does that mean my client can assume they meet the eligibility test for the exclusion?  

[IRonMaN]

No, they just get to call it a long term gain instead of short term.

[PPECPA]

Thank you!

[IRonMaN]

You betcha!

[getsmarttax88]

Any gift would be valued at the FMV at the time it was gifted. The parents would likely to be subject to the gift tax as it would also most likely exceed the annual gift tax allowance - not the best way to change ownership in property. You should easily be able to verify this by making a google search.

[getsmarttax88]

No Bob.

Per IRS.gov:

Question

What is the basis of property received as a gift?

Answer

To figure out the basis of property received as a gift, you must know three amounts:

• The donor's adjusted basis just before the donor made the gift.
• The fair market value (FMV) of the property at the time the donor made the gift.
• The amount of any gift tax paid on the gift 

If the FMV of the property at the time the donor made the gift is less than the donor's adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property.

• Your adjusted basis for figuring a gain is the donor's adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
• Your adjusted basis for figuring a loss is the FMV of the property at the time the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
• Note: If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property. 

If the FMV of the property at the time the donor made the gift is equal to or greater than the donor's adjusted basis, your adjusted basis is the donor's adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.

[abctax55]

@getsmarttax88 

Gifts are 'valued' at the basis of the person doing the giving - NOT at FMV.  Are you confusing the situation with inheriting???

If there was gift tax incurred I think it can be added to the basis (I think, I vaguely remember somethin' about that... I've never dealt with it.... just know I'd need to research it...)

[abctax55]

If the FMV of the property at the time the donor made the gift  "... is less than the donor's adjusted basis"

@getsmarttax88 

HIGHLY unlikely with a house...

[BobKamman]

---

@abctax55 wrote:

If the FMV of the property at the time the donor made the gift  "... is less than the donor's adjusted basis"

@getsmarttax88 

HIGHLY unlikely with a house...

---

Especially when the question asked is, "At this time I am trying to determine the gain on the sale of the gifted property.

But then, who takes the time to read the questions anymore?  

[sjrcpa]

@getsmarttax88 The FMV is used to report the gift on the gift tax return. It is not used for recipients' basis except in the unlikely circumstance mentioned.

[getsmarttax88]

Apparently you don't

• Your adjusted basis for figuring a loss is the FMV of the property at the time the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.

[sjrcpa]

And your point is?

OP said sold at a gain.

[IRonMaN]

Seems like we might be trying to communicate while someone is sitting in the dome of silence.

[abctax55]

@getsmarttax88 

At this time I am trying to determine the gain on the sale of the gifted property

What part of this statement in the original post is so hard to comprehend?

[PPECPA]

Wow!!!! 

I leave my computer for a few hours and miss so much.  First of all, thank you everyone for taking the time to respond to my question.  Based on all these responses I guess I'm still a bit confused.  

To be clear, the property was transferred by a gift from my clients parents to my client.  Let's call my client John.  I am unaware if John's parents filed a gift tax return  as I do not prepare John's parents taxes.  I have asked John if his parent's filed a gift tax return and I am waiting for that answer.  

To simplify things I am going to outline this fundamentally.   John's parents purchased the home over 30 years ago and owned the home outright at the time of transfer/gift to John.  John's parents purchased said home for $80,000 and paid off the mortgage long before transfer.  John is unable to locate any documentation on this but is still searching  No significant improvements (replacement of roof, new driveway, new A/C) were made to the home in the last 12 months prior to transfer, so I'm assuming the donors original basis is $80,000.

Parent's gifted home to John in December 2023.  Again, I am uncertain if a gift tax return was filed/paid (I've asked John to provide me this documentation).

I've asked John for the appraisal as an appraisal was done around the time of the transfer/gift to John.  John believes the appraisal amount to $380,000 but will firming this up by providing appraisal.   Based on this, I am assuming the FMV of the home at the time of transfer is $380,000.

John sold the home in February 2024 for $400,000 and purchased a new home in April 2024 for $500,000.  The purchase of the new home is irrelevant however as the tax laws have changed with respect to reinvesting the gain into a principal residence to defer the gain.

As John did not own or live in the home for a 24 month period it appears that John is ineligible for the exclusion of the gain.  That said, I am now trying to determine the amount of the gain that John will have to pay taxes on.  The answer to this question is significant so I want to be double sure I understand how to calculate this. 

So here's the question:

Is Johns Basis in the home he sold the FMV of the home at the time of transfer ($380,000) or is John's Basis in the home the donors (John's parents) original basis ($80,000)?

I've read and re-read Publication 551 Basis of Assets (12-2024).  The publication states that "if the FMV of the property equal to or greater than the original adjusted basis , your basis is the donor's adjusted basis at the time you received the gift."  

So what is John's basis in the Property?  FMV or Donor's original basis?

[Terry53029]

Not sure what you are confused about almost everyone told you " parents adjusted bases".

Here are IRS rules.

If the FMV of the property at the time the donor made the gift is less than the donor's adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property.

• Your adjusted basis for figuring a gain is the donor's adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.

[BobKamman]

The parents' basis is not just the original cost plus improvements in the last 12 months.  It's the original cost plus allowable additions to basis since they bought it. 

Doesn't really matter if a gift tax return was filed because people like this aren't worth enough to pay gift taxes.  And you don't need the FMV at time of gift, in any case.  

Why didn't the parents sell the house tax-free, then gift their son the cash for buying the home he really wanted? Maybe it's none of our business.  

[qbteachmt]

"however as the tax laws have changed with respect to reinvesting the gain into a principal residence to defer the gain."

You'd have to be able to make an argument that this was his investment property and not personal property. It never was his principal residence. It wasn't even his second home. It wasn't on the market and available to rent. Even then, "renting" to parents, even if there was money exchanged, would not qualify for investment property, and only investment property offers a deferred gain provision. And you stated he already made the sale, and bought a residence, which would mean that ship already sailed, anyway, and didn't apply, either. None of the personal residence or investment exchange rules apply.

You read it right here: "your basis is the donor's adjusted basis at the time you received the gift"

There is no step up for FMV. That happens with inheritance.