Today TaxMama® hears from Lisa in the TaxQuips Forum with this question. “I have a client that simply executed a quitclaim deed of a second home to her niece. She now wants to sell the home and is concerned about the tax consequences to both herself and her niece. How do I advise them both?”
Uh,….your client doesn’t own the home. If she quitclaimed 100% of the title to her niece, she doesn’t own it.[To everyone – please, please, please, do not simply go around quitclaiming property to people you like. Please talk to a tax professional about the ramifications. You may end up doing more harm than good by your generosity. There are ways to effect transfers where you can reduce the tax impact on everyone.]
The niece picks up the aunt’s basis, which may be quite low. And here’s some bad news (from Pub 17), if the second home was treated as a rental by the niece:
Gain on sale or trade of depreciable property. Your gain from the sale or trade of property to a related party may be ordinary income, rather than capital gain, if the property can be depreciated by the party receiving it. See chapter 3 of Publication 544 for more information.
You may want to do some research on related party transactions. It seems to me there are some laws in place regarding selling a property less than two years after acquiring it via a related party transfer. (Maybe someone else can find that for us?)
If it was treated as a rental, you may want to advise your client to seek legal counsel about undoing that quitclaim deed – with the niece’s approval, off course.
On the other hand, if it was not a rental, and the niece has been living in it for two years and has been on title for two years, the sale will qualify for the personal residence exclusion.[And – oh no! Another problem. There was no gift tax return filed, was there? If you can’t undo the gift – make sure to go back and file a gift tax return for the year the gift was made.]
And remember, you can find answers to all kinds of questions about gifting property and other tax issues, free. Where? Where else? At www.TaxMama.com.[Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
Please post all Comments and Replies in the new TaxQuips Forum .