Discussion:Equitable ownership section 121

Client moved out of home 5 years ago, leaving daughter & son living there.

No gift tax returns were filed but daughter & son started paying all of the utilities and maintenance and generally making the home their principal residence.

Parents continued to pay and deduct the mortgage interest.

Parents have now sold the home to the son.

Do you all think that it would be too far "out there" to consider the house as having been gifted to the children 5 years ago when the parents moved out?

We would contemplate filing a gift tax return for the "gift" that would have occurred 5 years ago when parents transferred equitable ownership to the children, knowing we are using up part of the parents' lifetime exemption. We would rationalize the subsequent deduction of the mortgage interest by the parents as based on their legal liability (Reg 1.163-1(b) allows deduction for interest on mortgages on real estate which the taxpayer is "legal or equitable" owner.)

Thanks for any thoughts on this.

Sorry, but it appears the client wants the cake & eat it too.

Equitable ownership requires that a taxpayer bear the "benefits AND burdens" of ownership. I don't see how the children remotely assumed equitable ownership. Given the new preparer penalties in §6694, your proposal gives the "benefits" to your client but the "burdens" will fall on you.