Determining Gain with Gifted Property

Determining capital gains taxes on property can be especially difficult when the property in question was a gift. In this article we will explain how to determine your gain when you receive a gifted property, and when a 1031 exchange is a good option.

When Your Father Gifts a Property to You

If your father gifts property to you, then you may take a carry-over basis (his basis) in the property received by gift during his lifetime. See IRC Section 1015 (for intervivos gifts made during the grantor's lifetime, Taft v. Bowers, 278 U.S. 470 (1929)) and also IRC Section 1014 (for inheritance for a deceased person).

You may need to find out how low your father’s basis is, because that may be your basis received in the property if it is made during your father's lifetime.

Gain is generally determined by subtracting your basis from the net sale price (amount realized) on the sale.

1031 Like-Kind Exchange

If you want to defer the gain, you may consider doing an IRC Section 1031 like-kind exchange.

In order to qualify for a 1031 exchange, both the property given up (sold) and the new properties received must be held for investment / business or for use in your trade; so you may need to hold the gifted property for one of these qualified purposes for a period of time before exchanging out of it.  

• Start Your 1031 Exchange: If you have questions about gain with gifted property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Gifted Property & 1031 Exchanges

Many people are unaware that you can conduct a 1031 exchange of property that you received as a gift. If you held the gifted property for a qualified purpose, which is for investment purposes or for use in your trade or business, then you should be able to defer the federal capital gains taxes.

In a 1031, both your old property (relinquished property) and your new like-kind property (replacement property) will qualify for 1031 exchange treatment if they are considered to be qualified use property.

Proving Your Intent to Hold for a Qualified Purpose

It is important that you intend to hold your properties for investment purposes in order to qualify for 1031 tax deferral. This means that your property involved in the exchange must be held for investment or used in your trade or business. If you used the property for personal use (such as your home) or held the property as inventory or stock in trade (i.e. they are held for sale), then they may not qualify for 1031 exchange.

A good way to prove that you have the proper intent to hold for a property for qualified purpose is to keep your properties for a substantial period of time, so that you can show you had the intent to hold for investment. During this holding period you can do things with your property that are consistent with investment or business. (i.e. renting them out for market rate lease). However, there is no mandatory minimum period of time that you must own property before conducting a 1031 exchange.

If you have a few years of tax returns showing that the property was held consistent with business or investment (i.e. showing rental income, deprecation or other business expenses) you will able to prove your case much better if you are ever audited.

• Start Your 1031 Exchange: If you have questions about gifting property after a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved