Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 13, 1995 TAG: 9502140003
SECTION: BUSINESS PAGE: A8 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
What are the tax consequences of these actions? Will they need to file a gift tax return on the property and would they owe taxes now? On what basis would the tax be figured? The property was purchased in the mid-1940s. Would we sisters be hit by a large tax bill after their deaths? We believe the estate will total less than $600,000.
A: Based on the information provided, it appears that your parents have a joint life estate and you and your sisters have a future interest in the properties. The two properties were assigned values based on IRS valuation tables using the fair market value at the time of the gift. The calculation is too complex and beyond the scope of this article to explain. The amount of the value assigned to the gifted properties is the amount to be reported on the gift and estate tax return.
Generally, if you give more than $10,000 during the year from any one donor you must file a gift tax return. However, the annual exclusion of $10,000 is limited to gifts of present interest. Your gift is a future interest, and your parents must file a gift tax return, Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return for the gift of the two farm properties. The gift tax return must be filed no later than April 15 of the calendar year after the gift was made.
Each taxpayer has a unified credit of $192,800 which is equivalent to an exemption of $600,000. This is first used to offset gift taxes and then estate taxes. Since the total value of the two farm properties gifted is believed to be below $600,000, there will be no gift taxes due for 1994. Furthermore, since the total estate may be less than $600,000, there should not be any estate taxes due at death either.
The value of the certificates of deposit will be included in the estate, with the proceeds payable to you and your sisters at death. There are no taxes due from you or your sisters when you receive the certificates of deposit from the estate.
However, there are individual income tax consequences that could have been avoided if the estate was structured in another way.
The cost basis of the property gifted to you and your sisters is your parents' basis from the 1940s. If the two properties would have remained your parents' and included in your parents' estate at the fair market value, you and your sisters would have received the properties at the fair market value (step up basis) at the date of death or the fair market value six months after death if the alternative valuation is elected.
Thus, if you or you sisters decide to sell the properties, you will have a significant capital gain. With proper planning, you may be able to reduce the capital gains if you decide to sell the properties.
In addition, if the inclusion of the two farms in the estate would have caused the estate to be valued over $600,000, there is relief under a special-use valuation for farm properties. Section 2032A will allow a lower federal estate tax value for its special use as a farm. The reduction in value is limited to $750,000. The value of the farms must comprise a large part of the total estate to elect alterative valuation of real estate.
In any event, based on the facts presented, there should not be any gift or federal estate taxes due from any of the family members.
-Answered by Charles F. Equi Jr. of Budd, Ammen & Co.
Q: I have two home mortgages; one house I live in and the other I rent by the month. The rent goes to pay the mortgage payment and up-keep on the house. I do not make anything from renting the home; I am actually losing money by renting this way.
Can I count the interest of both mortgages off my taxes when filing, or do I just count the interest off on the house that I live in?
A: In order for mortgage interest to be deductible as an itemized deduction, the interest must be considered "qualified mortgage interest." Qualified mortgage interest is generated from the acquisition or equity loan indebtedness secured by a taxpayer's qualified personal residence. A qualified personal residence includes a taxpayer's principal residence plus one other residence used personally by him or her.
Assuming the loan on the rental house is not secured by your principal residence and that there is no personal use by you of the rental house, the rental house is not considered a qualified personal residence and the related mortgage interest is not deductible as an itemized deduction.
However, the rental house interest, along with any other expenses associated with the rental house, may be used as a deduction from the gross rental income received. The net income or loss from the rental activity should be reported on Schedule E of Form 1040. Any net income from the activity is taxable while any net loss from the activity may be deductible, subject to certain complicated limitations, on your personal income tax return.
If the rental house is used personally during the tax year, the Internal Revenue Code provides a set of rules to determine whether the house is considered a personal residence or a rental activity. When there is dual use, the interest and other expenses are allocated between the rental activity and the personal use. The personal use portion of the interest may or may not be deductible. If the house is considered to be a personal residence, the personal portion of the interest may be deductible as interest on a qualified second residence. If the house is determined to be a rental activity, the personal portion of the interest is not deductible at all.
For a more detailed discussion on residential rental real estate, please see IRS Publication 527, "Residential Rental Property (Including Rental of Vacation Homes)." Copies are available at the local IRS office or by calling 1-800-TAX-FORM.
-Answered by Allen Spell of Brown, Edwards & Co.
by CNB