August 30, 2016 in Taxes

Calculating capital-gain tax on gifted rental property from in-laws who want to sell

Dear Tax Talk,

We got a 50% ownership gift in a 4-unit property from my in-laws and will have been on the title for about 3 months. Now they have told us they need to sell and can split the profits as equal owners, yet we have to pay capital gains on our part.

We do our taxes as married filing jointly and make a maximum of $94K a year gross with one dependent. What should we expect to pay for the sale? What options do we have to cut back on tax pay, if any?

— Jazmin

Jacek Kadaj/Getty Images

Dear Jazmin,

It is great to see that you are taking a proactive step by determining the tax situation with the sale of the property now versus later. There are many missing pieces to this puzzle, so I will tell you the information you need to figure this out for you and your family, and then you can take it from there.

You will calculate your gain on the sale of the property by deducting your “adjusted basis” from the sales price. Because you received the property as a gift, the adjusted basis of the donor (your in-laws) transferred to you and your husband. Additionally, if this was rental property where depreciation was claimed, you may have to recapture some of the gain as ordinary income rather than capital-gain income.

I suggest you sit down with a qualified tax professional to help you calculate the tax implications with this transaction and then work with you on how to minimize the tax.

If you and your spouse both have jobs that offer a 401(k) plan, see if you can max out your contributions for this year.

Your in-laws will have to fill out a gift-tax return — Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return — if the fair market value of the 50% interest in the 4-unit property is more than $14,000. On Schedule A of Form 709, they are required to list the adjusted basis of the property that is being gifted. For 2016 gifts, the tax return generally needs to be filed no earlier than Jan. 1, 2017 and no later than April 17.

Thanks for the great question and all the best to you on a successful sale of the rental property.

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