DEAR BOB: What are the benefits and tax consequences for transferring title to one of my adult children for a rental property? I bought the property in 1992 for $78,000, converted it to a rental in 1999, and it is currently worth about $288,000. Will I have to pay any gift tax? – Claude R.
DEAR CLAUDE: Probably not. Because your real estate gift to your adult child exceeds the $11,000 annual gift tax exemption per donee, you must file a federal gift tax return. But no federal gift tax will be due if you have not given away more than $1 million in non-exempt lifetime gifts.
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However, you will be creating a capital gain tax problem for your donee. The reason is the donee takes over the donor’s adjusted cost basis, which, in your situation, is extremely low since you have been deducting rental property depreciation.
Unless there is a compelling reason to give away your property now, your adult child will be much better off taxwise inheriting the property at its stepped-up market-value basis when you die. Then there is no capital gain tax to consider. For full details, please consult your tax adviser.
NOISY AIR CONDITIONER IS A PRIVATE NUISANCE
DEAR BOB: My home is located near the clubhouse in a community of 1,340 homes. Last year, the clubhouse air conditioner was replaced. It runs from 5:10 a.m. to 9:30 p.m. The new 10-ton unit, which we are told is the same model as the previous one, is much noisier. It is in excess of 85 decibels at the unit and 58-61 decibels on our patio. It can be heard inside our homes even with the windows closed. All of the homeowners adjacent to the clubhouse have complained to the homeowner’s association board of directors. They refuse to act since the noise affects only a few homeowners. How should we proceed? – Les H.
DEAR LES: The situation you describe is a “private nuisance.” That means it affects only a few nearby residents. Your legal remedy is a lawsuit against your homeowner’s association to abate the private nuisance.
If the noise affected many homeowners, then it would be a “public nuisance” with different legal remedies. For full details, please consult a local real estate attorney.
TESTAMENTARY TRUST MIGHT PREVENT STEPPED-UP BASIS FOR HEIRS
DEAR BOB: My father died in 1982. He placed his assets in a testamentary trust for his surviving wife. She died in September 2004. Part of the estate included rental property. Do the heirs have to pay capital gains tax on the sale of the rental? If so, how will the cost basis be determined? Our lawyer says each heir (there are more than 10) is responsible for his or her share of the capital gains tax on the property. Is there any way to avoid this tax? – Angelo M.
DEAR ANGELO: You need a second opinion from your personal tax adviser, not the attorney for the estate. If the 10 heirs inherited the real estate from your late mother, you should receive a new stepped-up basis to market value on the date of her death.
The only capital gain would be any net sales proceeds received which exceed that stepped-up valuation. If the 10 heirs received equal shares, then each heir owes 1/10th of the capital gain tax.
However, that testamentary trust muddies the situation. Perhaps the heirs are not entitled to a stepped-up basis on the inherited real estate. That’s why you and the other heirs need to consult your tax adviser to review the documentation.
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