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By Nick Borst Special to the Rappahannock News
Family real estate is often transferred from one generation to the next by inter vivos gift (during lifetime). Such a family tradition requires serious introspection when a recipient decides to sell.
Of course, there is concern that a family tradition would be violated
However, that is less significant than IRS rules on gifts, which are often not even on the radar screen for the donor who makes the gift, or a recipient who decides to sell the real estate.
In our area, real estate purchased 40 years ago for $15,000 could be worth more $1,000,000 today. If real estate is given by inter vivos gift over those 40 years, the tax implications are noteworthy, and not intuitive.
They should be evaluated carefully by the current owner who wants to sell during his or her lifetime.
Gifts, inheritance
The basic rule is that you receive a gift (not an inheritance) with the “basis” of the grantor.
“Basis” is the value the IRS gives to property, based on its acquisition cost, plus any capital improvements (depreciation would be a factor for commercial property).
If a parent gives a child real estate and the child sells the real estate, the taxable profit (capital gains) is the difference between the parent’s basis and the selling price.
The mistake often made is to assume that the parent’s basis is the property’s value when the parent received the gift.
Let’s say that a father, “Bob,” was given real estate in 1989 by his father when it was worth $850,000.
His grandfather had bought it 40 years ago for $15,000, and had given it to Bob’s father in 1970.
Bob gave the real estate to his daughter, Ann Marie, in 2000, and she subsequently received a net of $1,000,000 when she sold it two years later.
The 20(7c capital gains on a profit of $150,000 T$1,000,000 minus $850,000) is $30,000, a pretty big hit,
96.0%