Gifting real estate not recommended

DEAR BOB: About a year ago, my elderly mother deeded to meher home and two rental properties I manage for her. Her attorney handled thequitclaim deeds and the recordings. Mother died in October 2006. When I talkedto my mother’s tax accountant he said, “It’s too bad your mother deededthe titles to you. If you had inherited those properties, you would have a newstepped-up basis of market value and you would owe practically zero tax whenyou sell them shortly after her death.” Is this true I don’t get a newstepped-up basis? –Ellen H.

DEAR ELLEN: Yes. Unfortunately, you didn’t inherit thoseproperties. You received the titles as pre-death gifts. As the donee, you tookover your donor mother’s probably very low adjusted cost basis for theproperties.

Purchase Bob Bruss reports online.

That means, when you sell them, you will owe a large capitalgains tax. Unfortunately, your tax accountant is correct.

This situation shows why it is often best, especially when aparent anticipates dying soon, not to deed real estate to a potential heir. Theobvious reason is then the prospective heir won’t receive a new stepped-upbasis to market value on the date of death.


DEAR BOB: I am considering buying a vacant lot on which Iwant to build a home. What assurances can I receive before the purchase thatthe building permits and site plans will be approved by the local authorities?I do not want to be stuck with a lot on which I cannot build. –Pat E.

DEAR PAT: A buyer of vacant land has no assurances abuilding permit will be issued, even when the proposed plans exactly meet thezoning and other land-use rules. Depending on the city or county, I’ve seenfrustrated developers and landowners stalled for years when neighbors object orvariances are required.

For this reason, savvy raw-land buyers can often pay amodest price, typically 1 percent to 3 percent of the purchase price, for a12-month option to buy the land at a fixed price. That ties up the property andgives the buyer time to apply for the necessary permits. If they can’t beobtained, all it cost the potential buyer was the forfeited option money.


DEAR BOB: I own two rental properties. Let’s call them A andB. I have never lived in either one. Nor do I intend to. Let’s say I sell A andB on the same day and do an Internal Revenue Code 1031 tax-deferred Starkerexchange by identifying and purchasing property C. Assume I rent property C forthree years and then move in to make it my principal residence for two years.Then I sell property C. If the total capital gains on A, B and C are less than$500,000 (I am married and my wife would live with me in property C for atleast two years), can I sell property C without owing any tax? –Tim McW.

DEAR TIM: Yes. But you must hold title to property C atleast 60 months because it was acquired in a tax-deferred IRC 1031 exchange. Itdoes not become eligible for the IRC 121 $500,000 principal-residence-saleexemption until you have owned it at least five years, of which at least 24months it was your principal residence.

At the time of its acquisition, of course, it must be a”like kind” rental property, and the trade must qualify as atax-deferred IRC 1031 trade up.

Of course, be sure your sales of properties A and B complywith the IRC 1031(a)(3) Starker tax-deferred exchange rules. That means thesales proceeds must be held by a qualified third-party intermediary so younever have “constructive receipt” of the sales proceeds. For details,please consult a tax adviser who is familiar with Starker tax-deferredexchanges.

The new Robert Bruss special report, “2007 Realty TaxTips-Eight Chapters of Tax Savings for Homeowners and Realty Investors,”is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010,or by credit card at 1-800-736-1736 or instant Internet delivery at Questions for this columnare welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center

Copyright 2007 Inman News

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