Thanks so much for your response.
Whether or not you structure this under Option A or Option B below, there will be no gift tax
. Recipients of gifts are not subject to gift tax. And, there should also be no gift tax due from the donor. Each donor can give $14,000 per year per person under the annual gift exclusion. In addition to that, for any amounts in excess of the $14,000 in a year, each person has a $5,250,000 lifetime exemption....which means a person can give a cumulative amount of up to $5,250,000 in gifts over and above the $14,000 annual gift exclusion amount without incurring gift tax....the donor must file a gift tax return
to let the IRS
know how much of the lifetime exemption is being used, but there will be no gift tax until cumulative additional gifts have exceeded the $5,250,000.
But, the capital gains tax for your parents will vary depending upon whether or not you choose Option A or Option B.
Option A: Your parents give you the $16,500 and then you buy the property
for $81,500. In this case, your parents would pay capital gain tax on the difference between $81,500 and their basis of $19,500..i.e., they would have long term capital
gain of $62,000.
Option B: You structure this as part gift/part sale where you agree to buy it for $65,000. Your parents would be deemed to have made a gift of the $16,500 in value of the property and they would pay capital gain tax on the difference between $65,000 and their remaining basis of approximately $15,000 (it's reduced by the approximately 20% of their basis that carried over to you for the portion gifted)(I'm rounding for the purposes of illustration). ...i.e., they would have long term capital gain of approximately $50,000.
For 2013, the tax laws
of long term capital gains are as follows:
0% applies to long-term gains and dividend income
if a person is in the 10% and 15% tax brackets,
15% applies to long-term gains and dividend income if a person is in the 25%, 28%, 33%, or 35% tax brackets, and
20% applies to long-term gains and dividend income if a person is in the 39.6% tax bracket.
In addition, starting in 2013, capital gain income will be subject to an additional 3.8% Medicare
tax for taxpayers with income at or above a certain threshold. This 3.8% Medicare surtax applies to taxpayers with “net investment income” in excess of threshold income amounts of $200,000 for single filers and $250,000 for married couples filing
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