Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, August 21, 1995 TAG: 9508220104
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
What is our tax basis for the capital gain in this house? My attorney says my mother's life interest in the house means we use the appraised value on the date of her death. Our tax preparer says we must use my mother's tax basis because it was a gift. Who is right? The house appreciated considerably in the 30 years my mother owned it, so a large difference in taxes on the capital gain is involved.
A: The answer to your problem is not all that clear.
Charles F. Equi Jr., a certified public accountant with the Roanoke firm of Budd, Ammen & Co., said both the lawyer and the tax preparer have reasonable justification for their positions.
Generally, Equi said, property acquired by gift takes the donor's tax basis. At the time of the gift, the donor (the person giving the gift) gives the property without retaining any rights to the property. The donor gives a present interest instead of a future interest. Thus, he said, you have a completed gift.
The donor's basis at the time of the gift is usually his or her cost for the property, plus any gift tax paid. The gift is valued for gift and estate tax purposes at the fair market value at the date of the gift, Equi said.
However, the donee (the person receiving the gift) would use the donor's cost basis for any gain on the sale of the gifted property. Also, at the time of the gift, the donee's basis is limited to the lesser of the donor's basis or the fair market value for any loss on the sale of the gifted property.
For example, Equi said, a father gives a son stock that cost him $2,000 and has a fair market value of $10,000. The son's tax cost basis for any future sale of the stock would be $2,000.
In your case, your mother gave you the property and retained a simple life estate. This reserved to her the right to live there until her death. Equi said the uncertainty here is whether the gift was a completed gift. Because your mother retained an interest in her use of the house, this may be construed as an incomplete gift, he said. The house appears to be a gift of a future interest.
Internal Revenue Code section 2036 covers the situation you describe. It is a complicated passage of the tax law, but what it means, Equi said, is that any retained interest in property that did not meet specific terms required by the IRS will be brought back into the estate at the fair market value.
It would seem, Equi said, that under section 2036 the house would be brought back into the estate at the fair market value. Therefore, if the estate includes the house at its fair market value, the recipient would receive a stepped-up basis for reporting future sales.
If the property was gifted under a personal residence trust, he said, a completed gift could have been established if specific terms were met. However, there are many assumptions in this case that could change the tax cost basis to you and your husband.
Equi suggested that all the facts be presented to the lawyer and the tax preparer so a final agreement can be reached.
Contact broker to sell stock
Q: In August 1979, I purchased Ramada Inn stock. At this time, I would like to sell some, but I do not know whom to contact. I have never received dividends nor heard from them in any way. Until 1984, I lived in New Jersey, but moved to Virginia at that time.
A: You have to buy or sell this stock through a stockbroker. You can approach any broker who does business near your town and ask him or her to sell your shares. You will have to pay a commission. Large banks, such as Crestar, First Union and Signet, also offer discount brokerage services. Ask your branch manager to refer you to this operation.
by CNB