Discussion:Exclusion of gain on sale of residence
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Discussion Forum Index --> Tax Questions --> Exclusion of gain on sale of residence
| 19 July 2006 | |
| In 2002, my client added his son to the deed on his home in 2002 to avoid probate. My client (the father)sold the house in 2003 at a gain of approximately $200,000. The Father met the criteria for excluding the gain, but the son did not. Half of the proceeds were distributed to the son. I'd like to take the position that we can exlude the entire gain on the sale because the Father qualified for the exclusion and the son was only on the deed for probate-avoidance purposes. Then, after the sale, the father gifted half the proceeds to his son, prior to his death in early 2004. The position I'm trying to avoid is the son having to pay capital gain on his 1/2 share of the $200,000 gain. | |
| 19 July 2006 | |
| You might have a chance of asserting that the Dad was the equitable owner of 100% of the property if gift tax returns were filed in April of 2004 to report the gift of the sales proceeds to the son. | |
| 20 July 2006 | |
| April of 2005, actually, but I do hate these suckers. No gift tax filed on original transfer, yet splitting of proceeds is clear evidence of donative intent. | |
| July 20, 2006 | |
| I agree. My first thought before reading replies was...IF a gift tax return was filed, which I knew wouldn't be the case. Is it too late to file it now? That's the road I'd pursue, under the understanding that the gift would apply to your lifetime exclusion anyway...so you didn't know to file it. And then, file it if it still can be. | |
Michaelstar (talk|edits) said: | 20 July 2006 |
| Well, let me chime in on this one although I do admit, I agree in principle to Riley2 (of course), Dennis and JR1. First, if the sale happened in 2003, gift t/r would be due 04/15/2004 unless extended (which probably was not). Because Dear ole Dad put his son on title to avoid probate issues, would this truely be considered a gift (Riley2 - please help out here) or just a method of estate planning for a future gift (which is how I might see this unless Riley2 convinces all of us otheriwse). Now, as JR1 stated, so why should not the executor of the estate (if the Dad has passed away - God rest his soul if this is the case) or the Dad/Father not be able to file a late gift t/r to offically document his intentions. If that is possible which I believe to be the case, then Dad falls under the sec 121 $250 exclusion and the son walks with a chunk of change - better advise the son to take his Dad (and you) to dinner. | |
| 20 July 2006 | |
| The problem is the transfer of exactly half of the proceeds. Any other number and you're a winner. | |
| 20 July 2006 | |
| Another reason it's generally a bad idea for the parent to put their children on deed for probate avoidance purposes...not only does it potentially trigger gift tax issues, and sometimes cause the child to lose the step up basis -- but it also creates this type of Sec. 121 applicability issue, since quite often the child does not occupy the residence (plus the donor no longer has legal ownership of the transferred portion).
I don't know why so many attorneys continue to recommend such transfers, even when there aren't significant long term health concerns to the client. Is it just a popular misconception? | |
| 20 July 2006 | |
| I agree that it is possible to transfer legal ownerhip without transferring beneficial ownership. A transfer of legal title without transfer of beneficial ownership is not a gift. If there is some corroborating evidence that the beneficial ownership of 50% of the property was not gifted (e.g. written side agreement that the father retained all ownership rights of the property), then I believe that the it would be possible to argue that the son was legal titleholder only and that the title was transferred for convenience only.
I agree with Dennis that the fact that 50% of the proceeds were distributed to the son doesn't really help the case for a "convenience only" argument. | |
Michaelstar (talk|edits) said: | 20 July 2006 |
| Thanks Riley2 | |
| July 20, 2006 | |
| I should clarify that I did not mean that the gift occurred with the transfer of title. I would disregard that, as we generally do, contending that it was NOT a beneficial ownership. Rather, I'm talking about the gift of 1/2 of the proceeds after the sale. Dad's free to do with his money as he wishes, and so upon selling the house, gave his son 1/2. I don't know what the late penalties would be on that gift tax return, and perhaps you'd gain more scrutiny trying to make it go away. And if you did, it's thin, I admit. As usual, one phone call ahead could have saved all this... | |
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