TAX question help - Posted by Obi (San Diego)

Posted by Ronald * Starr(in No CA) on July 11, 2002 at 12:12:54:

Dave T---------------------------

You can sympathize with me. Yes, I have had many years when my federal taxable income was negative. That is one reasona I am a long-term rental property holder.

May I sympathize that you had to pay so much of your income to the governments? You could have probably have bought a house for that money, at least paid for recording the deed on a nothing down deal.

Good InvestingRon Starr******

TAX question help - Posted by Obi (San Diego)

Posted by Obi (San Diego) on July 10, 2002 at 14:06:20:

I’m selling one of my property but I don’t plan on buying another one as in doing a 1031Ex. The money from the equity I want to give it to my parents as a gift. Is there a way for me to go avoid paying 30% taxes since it is considered as income. Any feedback would be appreciated.

Response to Re: TAX question help - Posted by Peter_MD

Posted by Peter_MD on July 11, 2002 at 11:43:30:

Obi (San Diego):

As you are well aware, tax issues are extremely complicated and vary by circumstances.

To better answer your question (one answer does not fit all), details would need to be addressed (related to you and your parents).

Therefore, I highly suggest you contact a local CPA and present them the details. Use this time (as your first initial free consultation) to discuss your activities, any accounting or other tax needs or issues, and get to know the person and their knowledge as well as their professionalism.

Then, armed with this information, make a wise decision on the avenue of approach to provide a solution to this situation.

The only other person that I believe could give you any further information on this topic would be John Hyer (he has his own forum on this site). He could probably give you other suggestions.

Whatever you do, make the best of the situation while staying well within the law and the tax regulations.

I know that when you stated 30% you were referring to the combined Federal and State taxes on the transaction.

Good luck…just do it correctly based on all available facts and information. You don’t want to have to revisit this issue years from now just because something was overlooked.

Just my opinion on this matter…

Re: TAX question help - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 10, 2002 at 16:24:41:


You don’t tell us enough information to be able to help you much.

Is this an investment property that you have held for some years? If so, you should be able to sell it and only pay a 20% capital gains tax on your federal income taxes.

If it is a quick-turn property bought for resale at a profit, you will pay ordinary income taxes on all of the gain in the year of the sale. I am surprised that you say this would be 30%. I didn’t think there was a 30% federal tax bracket.

You also do not indicate what your parents are going to do with this property. If they are going to live in the property as their own home for at least two years(out of the five years prior to the sale), when they go to sell it, assuming current tax law still applies, they will be able to receive up to $250K capital gains–profit–apiece with no federal capital gains tax.

What if you were to sell it to your parents at a price which is close to your cost basis? You would have a very low gain upon which to be taxed. If they sell after living there, they probably have no capital gains tax to pay as discussed above. You pay little tax, they pay no tax, probably.

Now, there may be some IRS rules about not selling a property for less than fair market value to a related person. Then that person selling and taking the capital gains exclusion to prevent paying taxes. I think, in fact, that there is such a rule. You had better investigate to find out if there is such a rule.

You probably better consult a tax attorney, a CPA specializing in taxes, or both. I am neither an attorney nor been accused of being one. I am not a CPA, although my brother Roger Starr, in OR, is one.

Good Investing*************Ron Starr***********

Re: TAX question help - Posted by jeff

Posted by jeff on July 10, 2002 at 15:28:54:

yes, you can transfer the property to your parents and let THEM pay 30% taxes. LOL

seriously though, unless you have been living there it appears that capital gains is in your future.

and the part your not gonna like on top of that is the gift tax that yuor parents are gonna be paying once you give them this cash. this tax i beleive is somewhere intghe neighborhood of 40% or so. and yes again, this is on top of your already paid capital gains. if it was my decisions id check into transferring them the property and letting them get the cash directly instead of a gift. i am in no way an attoreny or a tax professional of any sort, so definately check into this with a CPA in your area. but to tell yuo the truth, mi not sure how the IRS is gona look at your property transferal, maybe this is a gift in itslef unless you disguise it as a sale and risk some other evasion laws.

my best advice is to see a CPA or better yet to seek counseling by a tax attorney who also handles real estate. and to save my butt befor ei get cussed again, every bit of this could be wrong since i have never had any training at all in tax law, but i do remember something about a gift tax. i just didnt want you to not ask ALL the questions when you see the attorney.

Re: TAX question help - Posted by Dave T

Posted by Dave T on July 10, 2002 at 18:37:42:

This year the marginal tax rate for taxable income between $65,550 and $136,750 is 30.5%.

Gift tax is paid by the donor, not the recipient - Posted by Dave T

Posted by Dave T on July 10, 2002 at 18:32:43:

The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced interest loan, you may be making a gift.

The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule.

Generally, the following gifts are not taxable gifts:

  1. The first $10,000 you give someone during a calendar year (the annual exclusion),
  2. Tuition or medical expenses you pay for someone (the educational and medical exclusions),
  3. Gifts to your spouse,
  4. Gifts to a political organization for its use, and
  5. Gifts to charities.

A separate $10,000 annual exclusion applies to each person to whom you make a gift. Therefore, you generally can give up to $10,000 each to any number of people each year and none of the gifts will be taxable.

If you are married, both you and your spouse can separately give up to $10,000 to the same person each year without making a taxable gift.

If you or your spouse make a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent (agree) to split the gift. If you do, you each can take the $10,000 annual exclusion for your part of the gift. Gift splitting allows married couples to give up to $20,000 to a person annually without making a taxable gift.

After you determine which of your gifts are taxable, you figure the amount of gift tax on the total taxable gifts and apply your unified credit for the year.

For example, let’s say that you (are single) and give your parents $50,000 from the sale of your property. The gift tax on $30,000 (the first $10,000 to each parent is excluded from gift taxes) is $6,000. You subtract the $6,000 from your unified credit of $1,000,000 for 2002. The amount of unified credit that you can use against the gift tax in a later year is reduced by $6,000. You do not have to pay any gift tax this year. However, you do have to file Form 709 (a Gift Tax Return).

For more information, you should get Form 709 and its instructions or Form 709-A.

Re: TAX question help - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 10, 2002 at 20:23:34:

Dave T------------

Thanks for the clarification.

With all my rental properties, my TAXABLE income does not come close to that lower limit.

Good InvestingRon Starr**

Re: TAX question help - Posted by Dave T

Posted by Dave T on July 10, 2002 at 23:56:40:

Either your income is very high and I envy you, or your income is considerably lower and I sympathize with you.

Personnally, I like to keep my taxable income very low. This last tax year I found myself in the incredible position of having more passive losses, itemized deductions, and personal exemptions than I could use. My taxable income was a large negative number this year – never happened to me before. Don’t you just hate it when you HAVE to suspend some passive losses because you can’t use them?

I figure that I must be doing something right when I can limit the amount of taxes I gave the federal and state governments combined over the past three years to $16 total.