Federal Income Tax Hypo-If anyone is interested
Posted: Sun Mar 18, 2012 9:26 pm
Here's a federal income tax hypo that I've been thinking about. It's just a hypo that I've created for personal prep for my tax I course. Curious if anyone else is interested...
Hypo:
In 1990, Mother purchases real property (house + land) in Gary, Indiana for $80,000 (FMV $80,000). Mother moves to Florida and lets the house sit. Squatters move in and vandalize the home and steal the copper piping.
In 2011, Mother donates the real property to Daughter who thinks she can refurbish the house and turn it into rental property (investment). At the time of transfer, the house has a fair market value of $5,000.
However, in 2012, Daughter figures out that the house is beyond repair and has it demolished for $10,000. Daughter donates the land to the city land bank for $1.00.
What are the potential tax consequences?
A) Daughter's Tax Liability
This is a gratuitous transfer, as the property was a gift from Mother to Daughter. Thus IRC §102 applies. Under §102(a), the value of real property acquired by gift is not included in income by Daughter, regardless of the amount. Gifts are capital that has already been taxed.
However, subsequent income from property following the acquisition through gift or inheritance is not exempt from taxation, nor is any gift or inheritance of an income interest in property. §102(b). Therefore, the property is subject to taxation in 2012 when Daughter transfers the property to the land bank.
Under §1015, this would be a loss transaction (sold for less than fair market value). For the purpose of determining loss, Daughter uses the fair market value of the property at the time of the gift ($5,000). Thus, Daughter's would realize a loss of $4,999 ($5,000 minus $1.00).
Because this was investment property, under §§166(a)(1), the $4,999 is fully deductible in year 2012 as an ordinary loss.
Note: I'm assuming there might be a depreciation issue here as well, but my class won't be covering depreciation for several weeks.
Hypo:
In 1990, Mother purchases real property (house + land) in Gary, Indiana for $80,000 (FMV $80,000). Mother moves to Florida and lets the house sit. Squatters move in and vandalize the home and steal the copper piping.
In 2011, Mother donates the real property to Daughter who thinks she can refurbish the house and turn it into rental property (investment). At the time of transfer, the house has a fair market value of $5,000.
However, in 2012, Daughter figures out that the house is beyond repair and has it demolished for $10,000. Daughter donates the land to the city land bank for $1.00.
What are the potential tax consequences?
A) Daughter's Tax Liability
This is a gratuitous transfer, as the property was a gift from Mother to Daughter. Thus IRC §102 applies. Under §102(a), the value of real property acquired by gift is not included in income by Daughter, regardless of the amount. Gifts are capital that has already been taxed.
However, subsequent income from property following the acquisition through gift or inheritance is not exempt from taxation, nor is any gift or inheritance of an income interest in property. §102(b). Therefore, the property is subject to taxation in 2012 when Daughter transfers the property to the land bank.
Under §1015, this would be a loss transaction (sold for less than fair market value). For the purpose of determining loss, Daughter uses the fair market value of the property at the time of the gift ($5,000). Thus, Daughter's would realize a loss of $4,999 ($5,000 minus $1.00).
Because this was investment property, under §§166(a)(1), the $4,999 is fully deductible in year 2012 as an ordinary loss.
Note: I'm assuming there might be a depreciation issue here as well, but my class won't be covering depreciation for several weeks.
