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  Dear
Tax Talk,
I have a case here involving two foreigners
and a real estate property located in California. I called the
IRS taxpayer hotline and they just can't give me any definite
answer. Instead, I'm referred to the tax technical librarian,
but I can never get a hold of that person. I have also talked
to two CPAs and their answers do not agree with each other.
I am so confused and hope you can help me. The details are as
follows:
- Foreigners A and B are mother and son, respectively.
- Both A and B are nonresident aliens, and
they do not have any U.S.-related business other than owning
a real property in California.
- A bought the house for investment purposes
10 years ago for $600,000, and now the property is worth
$1.2 million.
- A wants to give the property to B.
Could there be gift tax or any tax implications
involved in this situation? What if A decides to sell the
house to B at market price? Below market price? Would there
be any capital gain tax or any other tax implication involved
in either of these scenarios?
Thanks for your help in solving this tax
puzzle.
-- Joy
 Dear
Joy,
This isn't necessarily a puzzle, it's a matter of getting
good advice, and for the amount of money involved it behooves
your client to seek adequate counsel.
If mom wants to give her son the house, she'll
be footing a large gift tax bill. The sale of the property
at a below-market price results in a gift element as well
for the under-market value. That is, if she sells the house
for the $600,000 cost to avoid gain, she has made a gift of
the other $600,000 in value, which brings you back to the
gift tax problem.
If she sells the house to the son then at fair
market value, she pays tax on the $600,000 at 15 percent,
or $90,000 in tax. The purchase price could be retransferred
to the son in some form of gift by one foreigner to another,
which would be gift-tax free if in the form of cash. Perhaps
the son may think this is a fair price to pay for a $1.2 million
home.
The capital gains rate is at a historically
low rate for foreigners, and could go to solve an estate tax
problem for mom if she is elderly.
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