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Deduction for Forgiven Interest
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Stuart A. Bronstein
May 10, 2012, 10:46:12 AM5/10/12
to
I'm curious if any of you have any experience with this issue. I
have a client who is doing some estate planning, and I have a thought
for a plan, but I'd appreciate any feedback.
Say the client has rental property he wants to pass to his daughter.
To freeze the value for his estate and to get that value out of his
estate gradually, I'm thinking of having him sell the property to the
daughter. The note will call for interest that, by coincidence, will
be equal to or less than the annual exclusion.
Money will be collected from tenants and will be used to pay the
note. Interest will be forgiven, and the money collected from
tenants will go to pay down principal.
My thought is that, since it is investment property, any imputed
interest will be deductible, so in essence it won't be recognized by
either party to the transaction.
Does that sound right?
Thanks for any insights.
___
Stu
http://DownToEarthLawyer.com
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
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have a client who is doing some estate planning, and I have a thought
for a plan, but I'd appreciate any feedback.
Say the client has rental property he wants to pass to his daughter.
To freeze the value for his estate and to get that value out of his
estate gradually, I'm thinking of having him sell the property to the
daughter. The note will call for interest that, by coincidence, will
be equal to or less than the annual exclusion.
Money will be collected from tenants and will be used to pay the
note. Interest will be forgiven, and the money collected from
tenants will go to pay down principal.
My thought is that, since it is investment property, any imputed
interest will be deductible, so in essence it won't be recognized by
either party to the transaction.
Does that sound right?
Thanks for any insights.
___
Stu
http://DownToEarthLawyer.com
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
JoeTaxpayer
May 10, 2012, 11:06:26 AM5/10/12
to
On 5/10/12 10:46 AM, Stuart A. Bronstein wrote:
> I'm curious if any of you have any experience with this issue. I
> have a client who is doing some estate planning, and I have a thought
> for a plan, but I'd appreciate any feedback.
>
> Say the client has rental property he wants to pass to his daughter.
> To freeze the value for his estate and to get that value out of his
> estate gradually, I'm thinking of having him sell the property to the
> daughter. The note will call for interest that, by coincidence, will
> be equal to or less than the annual exclusion.
>
> Money will be collected from tenants and will be used to pay the
> note. Interest will be forgiven, and the money collected from
> tenants will go to pay down principal.
>
> My thought is that, since it is investment property, any imputed
> interest will be deductible, so in essence it won't be recognized by
> either party to the transaction.
I sell to my daughter and forgive $13000 interest each year. I have to
> I'm curious if any of you have any experience with this issue. I
> have a client who is doing some estate planning, and I have a thought
> for a plan, but I'd appreciate any feedback.
>
> Say the client has rental property he wants to pass to his daughter.
> To freeze the value for his estate and to get that value out of his
> estate gradually, I'm thinking of having him sell the property to the
> daughter. The note will call for interest that, by coincidence, will
> be equal to or less than the annual exclusion.
>
> Money will be collected from tenants and will be used to pay the
> note. Interest will be forgiven, and the money collected from
> tenants will go to pay down principal.
>
> My thought is that, since it is investment property, any imputed
> interest will be deductible, so in essence it won't be recognized by
> either party to the transaction.
claim that interest as income, no? As long as I have a legit loan to
her, paper in place, and lien on the property, the deal looks right, she
gets deduction, he pays tax on interest.
What's missing is that if he dies, there's a step up in basis. On this
sale, that appears to be lost.
Stuart A. Bronstein
May 10, 2012, 12:52:41 PM5/10/12
to
JoeTaxpayer <JoeTa...@comcast.net> wrote:
of debt income, you don't have to claim it. But then she gets an
interest deduction to offset the income.
> As long as I have a
> legit loan to her, paper in place, and lien on the property, the
> deal looks right, she gets deduction, he pays tax on interest.
>
> What's missing is that if he dies, there's a step up in basis.
> On this sale, that appears to be lost.
Yes, but the basis will be increased to the current market value on
the date of the sale, which is a help. The estate will have a note
that will probably have a value of less than the real estate it
helped purchase.
___
Stu
http://DownToEarthLawyer.com
> Stuart A. Bronstein wrote:
>> Say the client has rental property he wants to pass to his
>> daughter. To freeze the value for his estate and to get that
>> value out of his estate gradually, I'm thinking of having him
>> sell the property to the daughter. The note will call for
>> interest that, by coincidence, will be equal to or less than
>> the annual exclusion.
>>
>> Money will be collected from tenants and will be used to pay
>> the note. Interest will be forgiven, and the money collected
>> from tenants will go to pay down principal.
>>
>> My thought is that, since it is investment property, any
>> imputed interest will be deductible, so in essence it won't be
>> recognized by either party to the transaction.
>
> I sell to my daughter and forgive $13000 interest each year. I
> have to claim that interest as income, no?
My understanding is that if your daughter claims it as cancellation
>> Say the client has rental property he wants to pass to his
>> daughter. To freeze the value for his estate and to get that
>> value out of his estate gradually, I'm thinking of having him
>> sell the property to the daughter. The note will call for
>> interest that, by coincidence, will be equal to or less than
>> the annual exclusion.
>>
>> Money will be collected from tenants and will be used to pay
>> the note. Interest will be forgiven, and the money collected
>> from tenants will go to pay down principal.
>>
>> My thought is that, since it is investment property, any
>> imputed interest will be deductible, so in essence it won't be
>> recognized by either party to the transaction.
>
> I sell to my daughter and forgive $13000 interest each year. I
> have to claim that interest as income, no?
of debt income, you don't have to claim it. But then she gets an
interest deduction to offset the income.
> As long as I have a
> legit loan to her, paper in place, and lien on the property, the
> deal looks right, she gets deduction, he pays tax on interest.
>
> What's missing is that if he dies, there's a step up in basis.
> On this sale, that appears to be lost.
the date of the sale, which is a help. The estate will have a note
that will probably have a value of less than the real estate it
helped purchase.
___
Stu
http://DownToEarthLawyer.com
JoeTaxpayer
May 10, 2012, 2:33:35 PM5/10/12
to
On 5/10/12 12:52 PM, Stuart A. Bronstein wrote:
>> What's missing is that if he dies, there's a step up in basis.
>> On this sale, that appears to be lost.
>
> Yes, but the basis will be increased to the current market value on
> the date of the sale, which is a help. The estate will have a note
> that will probably have a value of less than the real estate it
> helped purchase.
Agreed, but the seller will have a cap gain (or is he covered by the
>> What's missing is that if he dies, there's a step up in basis.
>> On this sale, that appears to be lost.
>
> Yes, but the basis will be increased to the current market value on
> the date of the sale, which is a help. The estate will have a note
> that will probably have a value of less than the real estate it
> helped purchase.
$250/$500?). If the exclusion covers most of the gain, the strategy is
decent.
I cite the above lest someone do this with a very old house now worth a
lot of money where there's a gain for the seller that's huge.
For you guy, this plan may be perfect.
Stuart A. Bronstein
May 10, 2012, 5:36:07 PM5/10/12
to
JoeTaxpayer <JoeTa...@comcast.net> wrote:
>> Yes, but the basis will be increased to the current market
>> value on the date of the sale, which is a help. The estate
>> will have a note that will probably have a value of less than
>> the real estate it helped purchase.
>
> Agreed, but the seller will have a cap gain (or is he covered by
> the $250/$500?). If the exclusion covers most of the gain, the
> strategy is decent.
> I cite the above lest someone do this with a very old house now
> worth a lot of money where there's a gain for the seller that's
> huge. For you guy, this plan may be perfect.
The property wasn't his residence, so it doesn't qualify for the
>> Yes, but the basis will be increased to the current market
>> value on the date of the sale, which is a help. The estate
>> will have a note that will probably have a value of less than
>> the real estate it helped purchase.
>
> Agreed, but the seller will have a cap gain (or is he covered by
> the $250/$500?). If the exclusion covers most of the gain, the
> strategy is decent.
> I cite the above lest someone do this with a very old house now
> worth a lot of money where there's a gain for the seller that's
> huge. For you guy, this plan may be perfect.
exclusion. And with depreciation recapture he'll probably be paying
full rates on most if not all income. But since he's paying tax on
all the rents received anyway, and the net received will be roughly
the same, it shouldn't make a difference to him on that score.
___
Stu
http://DownToEarthLawyer.com
JoeTaxpayer
May 10, 2012, 6:16:07 PM5/10/12
to
On 5/10/12 5:36 PM, Stuart A. Bronstein wrote:
> The property wasn't his residence, so it doesn't qualify for the
> exclusion. And with depreciation recapture he'll probably be paying
> full rates on most if not all income. But since he's paying tax on
> all the rents received anyway, and the net received will be roughly
> the same, it shouldn't make a difference to him on that score.
>
I'd look at the numbers very carefully. Doing the math to see his tax
> The property wasn't his residence, so it doesn't qualify for the
> exclusion. And with depreciation recapture he'll probably be paying
> full rates on most if not all income. But since he's paying tax on
> all the rents received anyway, and the net received will be roughly
> the same, it shouldn't make a difference to him on that score.
>
bill for this "sale" vs the amount he's potentially saving in his estate
by selling this asset at the current value.
There's a tradeoff in this deal, as he's still giving up the non-taxed
step-up on his death.
Does he have the liquid funds to pay the tax bill? Depending on the
numbers, and the estate exclusion when he passes, it may work in his
favor or not. Just bringing up the issues that I see need analyzing.
Stuart A. Bronstein
May 10, 2012, 6:50:37 PM5/10/12
to
JoeTaxpayer <JoeTa...@comcast.net> wrote:
> Stuart A. Bronstein wrote:
>
>> The property wasn't his residence, so it doesn't qualify for
>> the exclusion. And with depreciation recapture he'll probably
>> be paying full rates on most if not all income. But since he's
>> paying tax on all the rents received anyway, and the net
>> received will be roughly the same, it shouldn't make a
>> difference to him on that score.
>
> I'd look at the numbers very carefully. Doing the math to see
> his tax bill for this "sale" vs the amount he's potentially
> saving in his estate by selling this asset at the current value.
> There's a tradeoff in this deal, as he's still giving up the
> non-taxed step-up on his death.
> Does he have the liquid funds to pay the tax bill? Depending on
> the numbers, and the estate exclusion when he passes, it may
> work in his favor or not. Just bringing up the issues that I see
> need analyzing.
Those are excellent points, and probably the reason I have never
> Stuart A. Bronstein wrote:
>
>> The property wasn't his residence, so it doesn't qualify for
>> the exclusion. And with depreciation recapture he'll probably
>> be paying full rates on most if not all income. But since he's
>> paying tax on all the rents received anyway, and the net
>> received will be roughly the same, it shouldn't make a
>> difference to him on that score.
>
> I'd look at the numbers very carefully. Doing the math to see
> his tax bill for this "sale" vs the amount he's potentially
> saving in his estate by selling this asset at the current value.
> There's a tradeoff in this deal, as he's still giving up the
> non-taxed step-up on his death.
> Does he have the liquid funds to pay the tax bill? Depending on
> the numbers, and the estate exclusion when he passes, it may
> work in his favor or not. Just bringing up the issues that I see
> need analyzing.
suggested this kind of thing for a client before. But this guy's
estate is well over $1 million, and paying income tax on any dollar
is going to be better than paying estate tax on it.
___
Stu
http://DownToEarthLawyer.com
Mark Bole
May 10, 2012, 8:04:27 PM5/10/12
to
On 2012/05/10 09:52, Stuart A. Bronstein wrote:
> JoeTaxpayer<JoeTa...@comcast.net> wrote:
>> Stuart A. Bronstein wrote:
>
>>> Say the client has rental property he wants to pass to his
>>> daughter. To freeze the value for his estate and to get that
>>> value out of his estate gradually, I'm thinking of having him
>>> sell the property to the daughter. The note will call for
>>> interest that, by coincidence, will be equal to or less than
>>> the annual exclusion.
>>>
>>> Money will be collected from tenants and will be used to pay
>>> the note. Interest will be forgiven, and the money collected
>>> from tenants will go to pay down principal.
>>>
>>> My thought is that, since it is investment property, any
>>> imputed interest will be deductible, so in essence it won't be
>>> recognized by either party to the transaction.
>>
>> I sell to my daughter and forgive $13000 interest each year. I
>> have to claim that interest as income, no?
>
> My understanding is that if your daughter claims it as cancellation
> of debt income, you don't have to claim it. But then she gets an
> interest deduction to offset the income.
Wait... what? I am probably missing many of the nuances here, but this
> JoeTaxpayer<JoeTa...@comcast.net> wrote:
>> Stuart A. Bronstein wrote:
>
>>> Say the client has rental property he wants to pass to his
>>> daughter. To freeze the value for his estate and to get that
>>> value out of his estate gradually, I'm thinking of having him
>>> sell the property to the daughter. The note will call for
>>> interest that, by coincidence, will be equal to or less than
>>> the annual exclusion.
>>>
>>> Money will be collected from tenants and will be used to pay
>>> the note. Interest will be forgiven, and the money collected
>>> from tenants will go to pay down principal.
>>>
>>> My thought is that, since it is investment property, any
>>> imputed interest will be deductible, so in essence it won't be
>>> recognized by either party to the transaction.
>>
>> I sell to my daughter and forgive $13000 interest each year. I
>> have to claim that interest as income, no?
>
> My understanding is that if your daughter claims it as cancellation
> of debt income, you don't have to claim it. But then she gets an
> interest deduction to offset the income.
caught my attention. How does a gift (as implied by the $13K limit)
suddenly transform into cancellation of debt?
--
Mark Bole
EA in CA
makbo at pacbell dot net
JoeTaxpayer
May 10, 2012, 8:45:45 PM5/10/12
to
On 5/10/12 6:50 PM, Stuart A. Bronstein wrote:
> Those are excellent points, and probably the reason I have never
> suggested this kind of thing for a client before. But this guy's
> estate is well over $1 million, and paying income tax on any dollar
> is going to be better than paying estate tax on it.
Ok. In 2012, the lifetime gift exclusion is $5.12M. From what you
> Those are excellent points, and probably the reason I have never
> suggested this kind of thing for a client before. But this guy's
> estate is well over $1 million, and paying income tax on any dollar
> is going to be better than paying estate tax on it.
suggest above, the client fears having it drop to $1M, and having his
estate subject to 55% tax.
Why not counsel him to gift some or all of the property this year?
If his goal is tax avoidance (the legal good planning) then I'd first
consider how to start the process with no tax bill right now.
The sale of say $1M property to his daughter gets the physical building
out of his estate, but trades it for a note plus downpayment that add up
to the same $1M. The shift in title gets future gains out of the estate
but at what may be a high immediate cost.
Not knowing all the details, I'm just thinking out loud. He can gift a
fractional ownership for whatever share he wishes. If a building is
owned by a minority owner who has the right to not sell out, the value
is reduced quite a bit for the estate tax. I don't know more than that
about this than what I mentioned, but I've read there are many ways to
reduce asset value in the year prior to death to help pass more wealth
tax-free.
Stuart A. Bronstein
May 10, 2012, 9:01:29 PM5/10/12
to
JoeTaxpayer <JoeTa...@comcast.net> wrote:
> Stuart A. Bronstein wrote:
>
>> Those are excellent points, and probably the reason I have
>> never suggested this kind of thing for a client before. But
>> this guy's estate is well over $1 million, and paying income
>> tax on any dollar is going to be better than paying estate tax
>> on it.
>
> Ok. In 2012, the lifetime gift exclusion is $5.12M. From what
> you suggest above, the client fears having it drop to $1M, and
> having his estate subject to 55% tax.
> Why not counsel him to gift some or all of the property this
> year?
>From what I can tell that's a temporary fix. Assuming he does
> Stuart A. Bronstein wrote:
>
>> Those are excellent points, and probably the reason I have
>> never suggested this kind of thing for a client before. But
>> this guy's estate is well over $1 million, and paying income
>> tax on any dollar is going to be better than paying estate tax
>> on it.
>
> Ok. In 2012, the lifetime gift exclusion is $5.12M. From what
> you suggest above, the client fears having it drop to $1M, and
> having his estate subject to 55% tax.
> Why not counsel him to gift some or all of the property this
> year?
after the end of this year, any given made this year in excess of
the lifetime exemption in the year of death will have to be drawn
back into his taxable estate.
> If his goal is tax avoidance (the legal good planning) then I'd
> first consider how to start the process with no tax bill right
> now.
I'm thinking of how to transfer as much as possible to his kids
with the income tax staying about the same as it is.
> The sale of say $1M property to his daughter gets the physical
> building out of his estate, but trades it for a note plus
> downpayment that add up to the same $1M.
regulations require the note be secured), it will have a FMV less
than the property, it seems to me.
> He can gift a fractional ownership for whatever share
> he wishes. If a building is owned by a minority owner who has
> the right to not sell out, the value is reduced quite a bit for
> the estate tax. I don't know more than that about this than what
> I mentioned, but I've read there are many ways to reduce asset
> value in the year prior to death to help pass more wealth
> tax-free.
It's a little too late for a family limited partnership to have
much of an effect, it seems to me.
Thanks again for your input. I appreciate it.
___
Stu
http://DownToEarthLawyer.com
Stuart A. Bronstein
May 10, 2012, 9:04:15 PM5/10/12
to
Mark Bole <ma...@pacbell.net> wrote:
>> My understanding is that if your daughter claims it as
>> cancellation of debt income, you don't have to claim it. But
>> then she gets an interest deduction to offset the income.
>
> Wait... what? I am probably missing many of the nuances here,
> but this caught my attention. How does a gift (as implied by
> the $13K limit) suddenly transform into cancellation of debt?
When someone owes you money and you forgive the interest, either you
>> My understanding is that if your daughter claims it as
>> cancellation of debt income, you don't have to claim it. But
>> then she gets an interest deduction to offset the income.
>
> Wait... what? I am probably missing many of the nuances here,
> but this caught my attention. How does a gift (as implied by
> the $13K limit) suddenly transform into cancellation of debt?
pay tax on imputed interest or the debtor pays tax on cancellation of
debt income. At least that's the way I understand it. Interest on
small loans (up to principal of $10,000 as I recall) can be ignored.
But not larger loans.
I'm sure I've gotten some of the details wrong, but that's my
understanding.
___
Stu
http://DownToEarthLawyer.com
JoeTaxpayer
May 10, 2012, 9:34:15 PM5/10/12
to
On 5/10/12 9:01 PM, Stuart A. Bronstein wrote:
>> From what I can tell that's a temporary fix. Assuming he does
> after the end of this year, any given made this year in excess of
> the lifetime exemption in the year of death will have to be drawn
> back into his taxable estate.
I bookmarked one article on this issue -
>> From what I can tell that's a temporary fix. Assuming he does
> after the end of this year, any given made this year in excess of
> the lifetime exemption in the year of death will have to be drawn
> back into his taxable estate.
http://taxprof.typepad.com/files/clawback.pdf
Of course, it's just one man's interpretation.
Your other responses are all well reasoned, Stu. The tax code really is
a mess to deal with. I'd like to see some long term commitments, and
fewer patches and short term extensions.
Don't forget, if the daughter is married, that's $26K/yr total to gift.
Interesting situation.
Alan
May 10, 2012, 10:32:03 PM5/10/12
to
On 5/10/12 10:52 AM, Stuart A. Bronstein wrote:
> JoeTaxpayer<JoeTa...@comcast.net> wrote:
>> Stuart A. Bronstein wrote:
>
>>> Say the client has rental property he wants to pass to his
>>> daughter. To freeze the value for his estate and to get that
>>> value out of his estate gradually, I'm thinking of having him
>>> sell the property to the daughter. The note will call for
>>> interest that, by coincidence, will be equal to or less than
>>> the annual exclusion.
>>>
>>> Money will be collected from tenants and will be used to pay
>>> the note. Interest will be forgiven, and the money collected
>>> from tenants will go to pay down principal.
>>>
>>> My thought is that, since it is investment property, any
>>> imputed interest will be deductible, so in essence it won't be
>>> recognized by either party to the transaction.
>>
>> I sell to my daughter and forgive $13000 interest each year. I
>> have to claim that interest as income, no?
>
> My understanding is that if your daughter claims it as cancellation
> of debt income, you don't have to claim it. But then she gets an
> interest deduction to offset the income.
There is no cancellation of debt income for the interest as it meets one
> JoeTaxpayer<JoeTa...@comcast.net> wrote:
>> Stuart A. Bronstein wrote:
>
>>> Say the client has rental property he wants to pass to his
>>> daughter. To freeze the value for his estate and to get that
>>> value out of his estate gradually, I'm thinking of having him
>>> sell the property to the daughter. The note will call for
>>> interest that, by coincidence, will be equal to or less than
>>> the annual exclusion.
>>>
>>> Money will be collected from tenants and will be used to pay
>>> the note. Interest will be forgiven, and the money collected
>>> from tenants will go to pay down principal.
>>>
>>> My thought is that, since it is investment property, any
>>> imputed interest will be deductible, so in essence it won't be
>>> recognized by either party to the transaction.
>>
>> I sell to my daughter and forgive $13000 interest each year. I
>> have to claim that interest as income, no?
>
> My understanding is that if your daughter claims it as cancellation
> of debt income, you don't have to claim it. But then she gets an
> interest deduction to offset the income.
of the exceptions. Specifically, the interest would have been deductible
on Schedule E if paid. As such, there is no income to the daughter and
there is no tax deduction for the daughter.
However, I believe that the cost basis of the property has to be
adjusted for the forgiveness. See the instructions for Form 982.
Additionally, no one seems to have mentioned that this is an installment
sale. The father either declares the profit on the sale annually or
elect to take all the profit in the year of sale.
>
>> As long as I have a
>> legit loan to her, paper in place, and lien on the property, the
>> deal looks right, she gets deduction, he pays tax on interest.
>>
>> What's missing is that if he dies, there's a step up in basis.
>> On this sale, that appears to be lost.
>
> Yes, but the basis will be increased to the current market value on
> the date of the sale, which is a help. The estate will have a note
> that will probably have a value of less than the real estate it
> helped purchase.
>
> ___
> Stu
> http://DownToEarthLawyer.com
>
--
http://taxtopics.net
Pico Rico
May 11, 2012, 11:19:51 AM5/11/12
to
"Stuart A. Bronstein" <spam...@lexregia.com> wrote in message
news:XnsA04FB74AD1330s...@130.133.4.11...
keeps the income stream from the note as you wish.
Stuart A. Bronstein
May 11, 2012, 1:12:55 PM5/11/12
to
"Pico Rico" <Pico...@nonospam.com> wrote:
>> He's already paying income tax on the income from the building.
>> I'm thinking of how to transfer as much as possible to his kids
>> with the income tax staying about the same as it is.
>>
>>> The sale of say $1M property to his daughter gets the physical
>>> building out of his estate, but trades it for a note plus
>>> downpayment that add up to the same $1M.
>
> why not gift the building subject to a retained note? No
> capital gains, he keeps the income stream from the note as you
> wish.
Selling the property on an installment sale is exactly what I'm
>> He's already paying income tax on the income from the building.
>> I'm thinking of how to transfer as much as possible to his kids
>> with the income tax staying about the same as it is.
>>
>>> The sale of say $1M property to his daughter gets the physical
>>> building out of his estate, but trades it for a note plus
>>> downpayment that add up to the same $1M.
>
> why not gift the building subject to a retained note? No
> capital gains, he keeps the income stream from the note as you
> wish.
talking about.
But your suggestion really misses a lot of issues, and could cause
a lot of problems. Payments on a note would consist of interest,
capital gain and return of principal. Some of the capital gain
would be subject to depreciation recapture.
Then there is the issue of whether the gift portion should consist
of interest or principal, and whether to make a large gift now or
to do it a bit at a time, or a combination of the two.
___
Stu
http://DownToEarthLawyer.com
Pico Rico
May 12, 2012, 1:54:50 PM5/12/12
to
news:XnsA04FA119665BDs...@130.133.4.11...
pay estate tax on. Kind of a double whammy.
> JoeTaxpayer <JoeTa...@comcast.net> wrote:
>> Stuart A. Bronstein wrote:
>>
>>> The property wasn't his residence, so it doesn't qualify for
>>> the exclusion. And with depreciation recapture he'll probably
>>> be paying full rates on most if not all income. But since he's
>>> paying tax on all the rents received anyway, and the net
>>> received will be roughly the same, it shouldn't make a
>>> difference to him on that score.
>>
>> I'd look at the numbers very carefully. Doing the math to see
>> his tax bill for this "sale" vs the amount he's potentially
>> saving in his estate by selling this asset at the current value.
>> There's a tradeoff in this deal, as he's still giving up the
>> non-taxed step-up on his death.
>> Does he have the liquid funds to pay the tax bill? Depending on
>> the numbers, and the estate exclusion when he passes, it may
>> work in his favor or not. Just bringing up the issues that I see
>> need analyzing.
>
> Those are excellent points, and probably the reason I have never
> suggested this kind of thing for a client before. But this guy's
> estate is well over $1 million, and paying income tax on any dollar
> is going to be better than paying estate tax on it.
>
except that he pays income tax, and has a lot of money left in his estate to
>> Stuart A. Bronstein wrote:
>>
>>> The property wasn't his residence, so it doesn't qualify for
>>> the exclusion. And with depreciation recapture he'll probably
>>> be paying full rates on most if not all income. But since he's
>>> paying tax on all the rents received anyway, and the net
>>> received will be roughly the same, it shouldn't make a
>>> difference to him on that score.
>>
>> I'd look at the numbers very carefully. Doing the math to see
>> his tax bill for this "sale" vs the amount he's potentially
>> saving in his estate by selling this asset at the current value.
>> There's a tradeoff in this deal, as he's still giving up the
>> non-taxed step-up on his death.
>> Does he have the liquid funds to pay the tax bill? Depending on
>> the numbers, and the estate exclusion when he passes, it may
>> work in his favor or not. Just bringing up the issues that I see
>> need analyzing.
>
> Those are excellent points, and probably the reason I have never
> suggested this kind of thing for a client before. But this guy's
> estate is well over $1 million, and paying income tax on any dollar
> is going to be better than paying estate tax on it.
>
pay estate tax on. Kind of a double whammy.
Pico Rico
May 12, 2012, 1:54:19 PM5/12/12
to
news:XnsA05067E1AEDA6s...@130.133.4.11...
property as a gift, but retaining a note on the property.
>
> But your suggestion really misses a lot of issues, and could cause
> a lot of problems. Payments on a note would consist of interest,
> capital gain and return of principal. Some of the capital gain
> would be subject to depreciation recapture.
no, not if it is not an installment sale.
> "Pico Rico" <Pico...@nonospam.com> wrote:
>
>>> He's already paying income tax on the income from the building.
>>> I'm thinking of how to transfer as much as possible to his kids
>>> with the income tax staying about the same as it is.
>>>
>>>> The sale of say $1M property to his daughter gets the physical
>>>> building out of his estate, but trades it for a note plus
>>>> downpayment that add up to the same $1M.
>>
>> why not gift the building subject to a retained note? No
>> capital gains, he keeps the income stream from the note as you
>> wish.
>
> Selling the property on an installment sale is exactly what I'm
> talking about.
That is not what I am talking about. I was talking about giving the
>
>>> He's already paying income tax on the income from the building.
>>> I'm thinking of how to transfer as much as possible to his kids
>>> with the income tax staying about the same as it is.
>>>
>>>> The sale of say $1M property to his daughter gets the physical
>>>> building out of his estate, but trades it for a note plus
>>>> downpayment that add up to the same $1M.
>>
>> why not gift the building subject to a retained note? No
>> capital gains, he keeps the income stream from the note as you
>> wish.
>
> Selling the property on an installment sale is exactly what I'm
> talking about.
property as a gift, but retaining a note on the property.
>
> But your suggestion really misses a lot of issues, and could cause
> a lot of problems. Payments on a note would consist of interest,
> capital gain and return of principal. Some of the capital gain
> would be subject to depreciation recapture.
Pico Rico
May 12, 2012, 1:55:33 PM5/12/12
to
"Pico Rico" <Pico...@nonospam.com> wrote in message news:...
>
> "Stuart A. Bronstein" <spam...@lexregia.com> wrote in message
> news:XnsA05067E1AEDA6s...@130.133.4.11...
>> "Pico Rico" <Pico...@nonospam.com> wrote:
>>
>>>> He's already paying income tax on the income from the building.
>>>> I'm thinking of how to transfer as much as possible to his kids
>>>> with the income tax staying about the same as it is.
>>>>
>>>>> The sale of say $1M property to his daughter gets the physical
>>>>> building out of his estate, but trades it for a note plus
>>>>> downpayment that add up to the same $1M.
>>>
>>> why not gift the building subject to a retained note? No
>>> capital gains, he keeps the income stream from the note as you
>>> wish.
>>
>> Selling the property on an installment sale is exactly what I'm
>> talking about.
>
> That is not what I am talking about. I was talking about giving the
> property as a gift, but retaining a note on the property.
>
>>
>> But your suggestion really misses a lot of issues, and could cause
>> a lot of problems. Payments on a note would consist of interest,
>> capital gain and return of principal. Some of the capital gain
>> would be subject to depreciation recapture.
>
> no, not if it is not an installment sale.
>
>
>
Let me clarify what I meant. What if he establishes a note on the property
> "Stuart A. Bronstein" <spam...@lexregia.com> wrote in message
> news:XnsA05067E1AEDA6s...@130.133.4.11...
>> "Pico Rico" <Pico...@nonospam.com> wrote:
>>
>>>> He's already paying income tax on the income from the building.
>>>> I'm thinking of how to transfer as much as possible to his kids
>>>> with the income tax staying about the same as it is.
>>>>
>>>>> The sale of say $1M property to his daughter gets the physical
>>>>> building out of his estate, but trades it for a note plus
>>>>> downpayment that add up to the same $1M.
>>>
>>> why not gift the building subject to a retained note? No
>>> capital gains, he keeps the income stream from the note as you
>>> wish.
>>
>> Selling the property on an installment sale is exactly what I'm
>> talking about.
>
> That is not what I am talking about. I was talking about giving the
> property as a gift, but retaining a note on the property.
>
>>
>> But your suggestion really misses a lot of issues, and could cause
>> a lot of problems. Payments on a note would consist of interest,
>> capital gain and return of principal. Some of the capital gain
>> would be subject to depreciation recapture.
>
> no, not if it is not an installment sale.
>
>
>
first, and then gifts the property subject to the existing note? Then,
payments on the note would not be part of any sale, no capital gain, etc.
Just thinking out loud.
Or gift 50% of the property to the daughter, and she buys the remaining 50%
for such a note. You could jigger the amount which is a gift, and the
amount which is cap gain, etc. as you wish.
interesting scenario.
Stuart A. Bronstein
May 12, 2012, 2:03:49 PM5/12/12
to
>> JoeTaxpayer <JoeTa...@comcast.net> wrote:
>>> Stuart A. Bronstein wrote:
>>>
>>> I'd look at the numbers very carefully. Doing the math to see
>>> his tax bill for this "sale" vs the amount he's potentially
>>> saving in his estate by selling this asset at the current
>>> value. There's a tradeoff in this deal, as he's still giving
>>> up the non-taxed step-up on his death.
>>> Does he have the liquid funds to pay the tax bill? Depending
>>> on the numbers, and the estate exclusion when he passes, it
>>> may work in his favor or not. Just bringing up the issues that
>>> I see need analyzing.
>>
>> Those are excellent points, and probably the reason I have
>> never suggested this kind of thing for a client before. But
>> this guy's estate is well over $1 million, and paying income
>> tax on any dollar is going to be better than paying estate tax
>> on it.
>
> except that he pays income tax, and has a lot of money left in
> his estate to pay estate tax on. Kind of a double whammy.
The idea is that he pays the same income tax he would have paid
>>> Stuart A. Bronstein wrote:
>>>
>>> I'd look at the numbers very carefully. Doing the math to see
>>> his tax bill for this "sale" vs the amount he's potentially
>>> saving in his estate by selling this asset at the current
>>> value. There's a tradeoff in this deal, as he's still giving
>>> up the non-taxed step-up on his death.
>>> Does he have the liquid funds to pay the tax bill? Depending
>>> on the numbers, and the estate exclusion when he passes, it
>>> may work in his favor or not. Just bringing up the issues that
>>> I see need analyzing.
>>
>> Those are excellent points, and probably the reason I have
>> never suggested this kind of thing for a client before. But
>> this guy's estate is well over $1 million, and paying income
>> tax on any dollar is going to be better than paying estate tax
>> on it.
>
> except that he pays income tax, and has a lot of money left in
> his estate to pay estate tax on. Kind of a double whammy.
anyway, and gets at least some of the property out of his estate.
Unfortunately it would have been easier and better if he'd started
years ago. But he doesn't have the time now he used to.
___
Stu
http://DownToEarthLawyer.com
Stuart A. Bronstein
May 12, 2012, 2:18:20 PM5/12/12
to
"Pico Rico" <Pico...@nonospam.com> wrote:
> "Pico Rico" <Pico...@nonospam.com> wrote
installment sale by definition.
> Let me clarify what I meant. What if he establishes a note on
> the property first, and then gifts the property subject to the
> existing note?
So he should borrow money secured by the property? Who does he
borrow it from? And what in the world would he do with the money
he borrows? I don't see how that makes any sense.
> Then, payments on the note would not be part of
> any sale, no capital gain, etc. Just thinking out loud.
If he got the cash from the loan you seem to be suggesting, he
still has the same basis in the property. His kid would get his
basis rather than current market value basis. That would result in
more income tax when the kid sells the house.
In addition, the cash he got from the "note" you suggest is cash
that will be taxed in his estate when he dies.
If you are suggesting he just create a note in the abstract, not
borrow money but just do it to make it seem as if he did, the whole
thing is a fraud and the IRS will ignore it.
___
Stu
http://DownToEarthLawyer.com
> "Pico Rico" <Pico...@nonospam.com> wrote
>> "Stuart A. Bronstein" <spam...@lexregia.com> wrote
>>> "Pico Rico" <Pico...@nonospam.com> wrote:
>>> But your suggestion really misses a lot of issues, and could
>>> cause a lot of problems. Payments on a note would consist of
>>> interest, capital gain and return of principal. Some of the
>>> capital gain would be subject to depreciation recapture.
>>
>> no, not if it is not an installment sale.
Of course it's an installment sale. Retaining a note makes it an
>>> But your suggestion really misses a lot of issues, and could
>>> cause a lot of problems. Payments on a note would consist of
>>> interest, capital gain and return of principal. Some of the
>>> capital gain would be subject to depreciation recapture.
>>
>> no, not if it is not an installment sale.
installment sale by definition.
> Let me clarify what I meant. What if he establishes a note on
> the property first, and then gifts the property subject to the
> existing note?
borrow it from? And what in the world would he do with the money
he borrows? I don't see how that makes any sense.
> Then, payments on the note would not be part of
> any sale, no capital gain, etc. Just thinking out loud.
still has the same basis in the property. His kid would get his
basis rather than current market value basis. That would result in
more income tax when the kid sells the house.
In addition, the cash he got from the "note" you suggest is cash
that will be taxed in his estate when he dies.
If you are suggesting he just create a note in the abstract, not
borrow money but just do it to make it seem as if he did, the whole
thing is a fraud and the IRS will ignore it.
___
Stu
http://DownToEarthLawyer.com
Bill Brown
May 12, 2012, 7:01:51 PM5/12/12
to
On May 12, 1:54 pm, "Pico Rico" <PicoR...@nonospam.com> wrote:
> "Stuart A. Bronstein" <spamt...@lexregia.com> wrote in messagenews:XnsA05067E1AEDA6s...@130.133.4.11...
about depreciation recapture and an installment sale. Gain equal to
depreciation recapture is recognized in the year of sale even if the
sale is an otherwise qualified installment sale and even if no
payments are received in the year of sale.
> "Stuart A. Bronstein" <spamt...@lexregia.com> wrote in messagenews:XnsA05067E1AEDA6s...@130.133.4.11...
>
>
>
>
>
>
>
>
>
> > "Pico Rico" <PicoR...@nonospam.com> wrote:
>
> >>> He's already paying income tax on the income from the building.
> >>> I'm thinking of how to transfer as much as possible to his kids
> >>> with the income tax staying about the same as it is.
>
> >>>> The sale of say $1M property to his daughter gets the physical
> >>>> building out of his estate, but trades it for a note plus
> >>>> downpayment that add up to the same $1M.
>
> >> why not gift the building subject to a retained note? No
> >> capital gains, he keeps the income stream from the note as you
> >> wish.
>
> > Selling the property on an installment sale is exactly what I'm
> > talking about.
>
> That is not what I am talking about. I was talking about giving the
> property as a gift, but retaining a note on the property.
>
>
>
> > But your suggestion really misses a lot of issues, and could cause
> > a lot of problems. Payments on a note would consist of interest,
> > capital gain and return of principal. Some of the capital gain
> > would be subject to depreciation recapture.
>
> no, not if it is not an installment sale.
>
It is true that the modifier "some" is not accurate in the statement
>
>
>
>
>
>
>
>
> > "Pico Rico" <PicoR...@nonospam.com> wrote:
>
> >>> He's already paying income tax on the income from the building.
> >>> I'm thinking of how to transfer as much as possible to his kids
> >>> with the income tax staying about the same as it is.
>
> >>>> The sale of say $1M property to his daughter gets the physical
> >>>> building out of his estate, but trades it for a note plus
> >>>> downpayment that add up to the same $1M.
>
> >> why not gift the building subject to a retained note? No
> >> capital gains, he keeps the income stream from the note as you
> >> wish.
>
> > Selling the property on an installment sale is exactly what I'm
> > talking about.
>
> That is not what I am talking about. I was talking about giving the
> property as a gift, but retaining a note on the property.
>
>
>
> > But your suggestion really misses a lot of issues, and could cause
> > a lot of problems. Payments on a note would consist of interest,
> > capital gain and return of principal. Some of the capital gain
> > would be subject to depreciation recapture.
>
> no, not if it is not an installment sale.
>
about depreciation recapture and an installment sale. Gain equal to
depreciation recapture is recognized in the year of sale even if the
sale is an otherwise qualified installment sale and even if no
payments are received in the year of sale.
Pico Rico
May 13, 2012, 11:58:50 AM5/13/12
to
"Stuart A. Bronstein" <spam...@lexregia.com> wrote in message
news:XnsA05172F8AA6BFs...@130.133.4.11...
So, have you concluded you have a new technique for removing property from
an estate? Is your new technique only relevant when the taxpayer wants to
keep the income stream (or much of it) during his life? How does this
compare with gifting a life estate?
Stuart A. Bronstein
May 13, 2012, 12:57:11 PM5/13/12
to
Bill Brown <w.p.br...@gmail.com> wrote:
> It is true that the modifier "some" is not accurate in the
> statement about depreciation recapture and an installment sale.
> Gain equal to depreciation recapture is recognized in the year
> of sale even if the sale is an otherwise qualified installment
> sale and even if no payments are received in the year of sale.
Thanks for that information, Bill. That could make a big difference
> It is true that the modifier "some" is not accurate in the
> statement about depreciation recapture and an installment sale.
> Gain equal to depreciation recapture is recognized in the year
> of sale even if the sale is an otherwise qualified installment
> sale and even if no payments are received in the year of sale.
in this plan.
___
Stu
http://DownToEarthLawyer.com
Stuart A. Bronstein
May 13, 2012, 1:13:13 PM5/13/12
to
"Pico Rico" <Pico...@nonospam.com> wrote:
> So, have you concluded you have a new technique for removing
> property from an estate? Is your new technique only relevant
> when the taxpayer wants to keep the income stream (or much of
> it) during his life? How does this compare with gifting a life
> estate?
It's not a new technique. It's only a slightly different take on an
> So, have you concluded you have a new technique for removing
> property from an estate? Is your new technique only relevant
> when the taxpayer wants to keep the income stream (or much of
> it) during his life? How does this compare with gifting a life
> estate?
old technique tailored for a specific person. That's what estate
planning is all about. If one size fitted all, nobody would need
lawyers or accountants.
That said, Bill's point about depreciation recapture occurring all at
once in the first year of an installment sale will make what I had
originally planned much less desirable.
Someone had mentioned that prevailing opinion is that a $5,000,000
gift can be given this year and not be drawn back into the donor's
estate. My reading of the code is the opposite, so I need to go back
and reevaluate that.
___
Stu
http://DownToEarthLawyer.com
JoeTaxpayer
May 13, 2012, 3:51:50 PM5/13/12
to
On 5/13/12 1:13 PM, Stuart A. Bronstein wrote:
> Someone had mentioned that prevailing opinion is that a $5,000,000
> gift can be given this year and not be drawn back into the donor's
> estate. My reading of the code is the opposite, so I need to go back
> and reevaluate that.
I did -
> Someone had mentioned that prevailing opinion is that a $5,000,000
> gift can be given this year and not be drawn back into the donor's
> estate. My reading of the code is the opposite, so I need to go back
> and reevaluate that.
I bookmarked one article on this issue -
http://taxprof.typepad.com/files/clawback.pdf
Of course, it's just one man's interpretation.
Stu - I'm interested in this particular issue (obviously). Anyone with a
http://taxprof.typepad.com/files/clawback.pdf
Of course, it's just one man's interpretation.
citation of an article supporting or contradicting the above, a link
would be appreciated.
I guess congress can do what they will. But, say the $5M (actually
$5.12M) is extended for a year at a time. In 2016, it drops to $1M.
Would a 2012 gift be subject to clawback? I read about how many lottery
winners go bust, self imploding from having too much money too soon. I
wonder how much of a $5M inheritance is left even after a year or two.
Good luck to the IRS to actually get it back.
To properly plug this hole, the rules should have clearly stated that
using one's lifetime exclusion was subject to a $1M limit instead, and
the full $5.12M only available on an actual death. Just my opinion.
I'm not one to complain about the tax code, but I do find the constant
changes and ambiguities to be unnerving. Consider how many transactions
are based on doing something now because such and such rule will change
next year. A great waste of time and effort.
LoTax
May 13, 2012, 9:36:51 PM5/13/12
to
The statement above about depreciation recapture being taxed in the
year of the installment sale whether or not there are payments in that
year might be correct, but there's **no** depreciation recapture,
almost certainly, in this proposed scenario. The depreciated property
is real estate, and it would have been depreciated straight-line and
*any* depreciation would be taxed as "unrecaptured section 1250 gain"
which *does not* get "triggered" in the year of sale. Check your
depreciation "recapture" and "unrecapture" rules.
This is **not** depreciation recapture, this is unrecaptured section
1250 gain.
year of the installment sale whether or not there are payments in that
year might be correct, but there's **no** depreciation recapture,
almost certainly, in this proposed scenario. The depreciated property
is real estate, and it would have been depreciated straight-line and
*any* depreciation would be taxed as "unrecaptured section 1250 gain"
which *does not* get "triggered" in the year of sale. Check your
depreciation "recapture" and "unrecapture" rules.
This is **not** depreciation recapture, this is unrecaptured section
1250 gain.
Bill Brown
May 14, 2012, 10:03:17 AM5/14/12
to
On May 13, 9:36 pm, LoTax <lo...@hotmail.com> wrote:
> This is **not** depreciation recapture, this is unrecaptured section
> 1250 gain.
It is convenient to use the less specific, though somewhat misleading,
> This is **not** depreciation recapture, this is unrecaptured section
> 1250 gain.
term, "depreciation recapture," to mean "unrecaptured Section 1250
gain," since the latter is triggered by (and limited to) cost recovery
(aka depreciation) deducted or allowed (in most cases) on the asset
being sold.
Short version: If we can't say "depreciation recapture" when we mean
"unrecaptured Section 1250 gain," then is it not also appropriate to
refrain from using "depreciation" when we mean "cost recovery"?
Note: The first paragraph above is the shorter, simplified (and, thus,
somewhat misleading) description of what is going on.
Bill Brown
May 14, 2012, 10:08:45 AM5/14/12
to
> This is **not** depreciation recapture, this is unrecaptured section
> 1250 gain.
>
My other reply notwithstanding, lotax is correct. Unrecaptured section
> 1250 gain.
>
1250 gain recognition is triggered first as installment payments are
collected. That is, all the URS1250G is recognized before any capital
gain (or Section 1230 gain) is recognized on the installment sale.
Stuart A. Bronstein
May 14, 2012, 3:46:09 PM5/14/12
to
Bill Brown <w.p.br...@gmail.com> wrote:
> LoTax <lo...@hotmail.com> wrote:
>
>> This is **not** depreciation recapture, this is unrecaptured
>> section 1250 gain.
>>
> My other reply notwithstanding, lotax is correct. Unrecaptured
> section 1250 gain recognition is triggered first as installment
> payments are collected. That is, all the URS1250G is recognized
> before any capital gain (or Section 1230 gain) is recognized on
> the installment sale.
But is the tax recognized as payments are received on the installment
> LoTax <lo...@hotmail.com> wrote:
>
>> This is **not** depreciation recapture, this is unrecaptured
>> section 1250 gain.
>>
> My other reply notwithstanding, lotax is correct. Unrecaptured
> section 1250 gain recognition is triggered first as installment
> payments are collected. That is, all the URS1250G is recognized
> before any capital gain (or Section 1230 gain) is recognized on
> the installment sale.
sale? Or is it recognized all at once or in some other way/
Thanks.
___
Stu
http://DownToEarthLawyer.com
LoTax
May 14, 2012, 5:55:55 PM5/14/12
to
> But is the tax recognized as payments are received on the installment
> sale? Or is it recognized all at once or in some other way?
The gain being reported under the installment method - in this
scenario - will be recognized only as the installments are collected,
i.e., as payments are received. In this scenario, there's no
"depreciation recapture" - which is the type of gain that gets
"triggered" by the sale, at the time of the sale, and is therefore
recognized in the year of the sale, i.e., whether or not any payments,
at all, are made in that year.
I hope this helps you address the income tax consequences of the
proposed estate value freeze.
Stuart A. Bronstein
May 14, 2012, 6:19:59 PM5/14/12
to
LoTax <lo...@hotmail.com> wrote:
>> But is the tax recognized as payments are received on the
>> installment sale? Or is it recognized all at once or in some
>> other way?
>
> The gain being reported under the installment method - in this
> scenario - will be recognized only as the installments are
> collected, i.e., as payments are received. In this scenario,
> there's no "depreciation recapture" - which is the type of gain
> that gets "triggered" by the sale, at the time of the sale, and
> is therefore recognized in the year of the sale, i.e., whether
> or not any payments, at all, are made in that year.
>
> I hope this helps you address the income tax consequences of the
> proposed estate value freeze.
Yes, thanks. My take is that income tax payable on real estate,
>> But is the tax recognized as payments are received on the
>> installment sale? Or is it recognized all at once or in some
>> other way?
>
> The gain being reported under the installment method - in this
> scenario - will be recognized only as the installments are
> collected, i.e., as payments are received. In this scenario,
> there's no "depreciation recapture" - which is the type of gain
> that gets "triggered" by the sale, at the time of the sale, and
> is therefore recognized in the year of the sale, i.e., whether
> or not any payments, at all, are made in that year.
>
> I hope this helps you address the income tax consequences of the
> proposed estate value freeze.
whether or not capital gain, will be less than estate tax if it were
paid instead on the same property. So from that standpoint the sale
of property might be helpful.
And, if gifts in excess of $1,000,000 are not brought back into the
estate of a person who dies after the end of 2012 (contrary to my
initial reading of the statutes, but I'm not always right), that is
another thing that will be useful.
Thanks again.
___
Stu
http://DownToEarthLawyer.com
Pico Rico
May 15, 2012, 10:38:16 AM5/15/12
to
news:XnsA0539BF2A7AB3s...@130.133.4.11...
> LoTax <lo...@hotmail.com> wrote:
>
>>> But is the tax recognized as payments are received on the
>>> installment sale? Or is it recognized all at once or in some
>>> other way?
>>
>> The gain being reported under the installment method - in this
>> scenario - will be recognized only as the installments are
>> collected, i.e., as payments are received. In this scenario,
>> there's no "depreciation recapture" - which is the type of gain
>> that gets "triggered" by the sale, at the time of the sale, and
>> is therefore recognized in the year of the sale, i.e., whether
>> or not any payments, at all, are made in that year.
>>
>> I hope this helps you address the income tax consequences of the
>> proposed estate value freeze.
>
> Yes, thanks. My take is that income tax payable on real estate,
> whether or not capital gain, will be less than estate tax if it were
> paid instead on the same property. So from that standpoint the sale
> of property might be helpful.
>
> And, if gifts in excess of $1,000,000 are not brought back into the
> estate of a person who dies after the end of 2012 (contrary to my
> initial reading of the statutes, but I'm not always right), that is
> another thing that will be useful.
until they change the tax code yet again, perhaps.
>
>>> But is the tax recognized as payments are received on the
>>> installment sale? Or is it recognized all at once or in some
>>> other way?
>>
>> The gain being reported under the installment method - in this
>> scenario - will be recognized only as the installments are
>> collected, i.e., as payments are received. In this scenario,
>> there's no "depreciation recapture" - which is the type of gain
>> that gets "triggered" by the sale, at the time of the sale, and
>> is therefore recognized in the year of the sale, i.e., whether
>> or not any payments, at all, are made in that year.
>>
>> I hope this helps you address the income tax consequences of the
>> proposed estate value freeze.
>
> Yes, thanks. My take is that income tax payable on real estate,
> whether or not capital gain, will be less than estate tax if it were
> paid instead on the same property. So from that standpoint the sale
> of property might be helpful.
>
> And, if gifts in excess of $1,000,000 are not brought back into the
> estate of a person who dies after the end of 2012 (contrary to my
> initial reading of the statutes, but I'm not always right), that is
> another thing that will be useful.
Stuart A. Bronstein
May 15, 2012, 1:14:30 PM5/15/12
to
JoeTaxpayer <JoeTa...@comcast.net> wrote:
> Stuart A. Bronstein wrote:
>
>>> From what I can tell that's a temporary fix. Assuming he does
>> after the end of this year, any given made this year in excess
>> of the lifetime exemption in the year of death will have to be
>> drawn back into his taxable estate.
>
> I bookmarked one article on this issue -
> http://taxprof.typepad.com/files/clawback.pdf
> Of course, it's just one man's interpretation.
> Your other responses are all well reasoned, Stu. The tax code
> really is a mess to deal with. I'd like to see some long term
> commitments, and fewer patches and short term extensions.
I looked at the article on the gift tax clawback for whether gifts
> Stuart A. Bronstein wrote:
>
>>> From what I can tell that's a temporary fix. Assuming he does
>> after the end of this year, any given made this year in excess
>> of the lifetime exemption in the year of death will have to be
>> drawn back into his taxable estate.
>
> I bookmarked one article on this issue -
> http://taxprof.typepad.com/files/clawback.pdf
> Of course, it's just one man's interpretation.
> Your other responses are all well reasoned, Stu. The tax code
> really is a mess to deal with. I'd like to see some long term
> commitments, and fewer patches and short term extensions.
over $1,000,000 would be included in the taxable estate for someone
dying after the end of 2012 (i.e. the gift tax exemption is higher
than the exemption allowed in the year of death).
The argument that there would be no clawback is based on a reading
of instruction on form 706. Those instructions were created during
a time when the exemption was increasing rather than decreasing.
However a plain reading of §2001 indicates that the instructions
are wrong. It says, basically, that the taxable estate must
include all taxable gifts (i.e. excluding the annual exemption, and
charitable and spousal gifts). Then there is a deduction for tax
that "would have been payable" under the tax rate schedule "in
effect at the decedent's death...."
If someone makes a gift of $5 million this year, and dies next year
when the lifetime exemption is $1 million, it appears that the
entire $5 million must be included, with credit for the tax on $1
million.
Personally I wouldn't want to be one of those who take the risk.
I've seen the IRS go after must less productive things. I suspect
that anyone who takes the no-clawback stance is very likely to
leave very disappointed heirs.
___
Stu
http://DownToEarthLawyer.com
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