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PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4514
Experience:  35 years tax experience, including four years at a Big 4 firm.
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I had a rental property (townhome) that I rented out(never

Customer Question

I had a rental property (townhome) that I rented out(never lived in it). In May of 2011 I had to retire because of lung cancer and chemo theraphy. I paid $102,000 for the property in Nov.2002. In may 2011, I could no longer make the payments. From that date forward, my son took over the payments for me and gave me the positive monthly cash flow of $250. I quit claimed the property to my son in May 2013. to pay back what he had paid in mortgage payments and H.O.A. fees.
I paid $40,000 as a down payment on the property in 2002. The money came from a 1031 exchange from the sale of a 4-plex.(this was always a rental, I never lived in the property)
Does the $40,000 get added to the basis of the exchange property? How does the I.R.S. get taxes from me for the original $40,000. Does it start from 2013 when I paid back the debt that I owed my son? My only income at this time is Social Security, I no longer own any real estate, and I am in bankruptcy as of Aug.2014. I am 78 years old.
thank you for your assistance-----***** **********@******.***
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.

Hi from Just Answer. I'm PDtax, and can assist.

Expert:  PDtax replied 1 year ago.

The transfer in may 2013 of your ownership could be treated as a sale, or as a gift, for tax purposes. Since you transferred the value in exchange for value, a debt, there are elements of a sale.
Which I am sure neither of you reported for tax purposes for 2013.

Expert:  PDtax replied 1 year ago.

It could also be considered a gift, without consideration. That value should be disclosed on a gift tax return, which would support your bankruptcy petition in 2015.

Expert:  PDtax replied 1 year ago.

Either way, the effect on basis for your son's purchase is different, depending on the tax treatment you select.

Your bankruptcy attorney can likely review your transaction and recommend the course of action best able to survive bankruptcy court scrutiny. The type of transfer you executed in 2013 will likely drive the tax treatment.

If all you did was a quitclaim transfer, the transaction might be open ended enough to do either. The sale likely creates a tax liability that would survive the bankruptcy, while the gift tax won't create a tax liability for you.

Thanks for asking at Just Answer. Positive feedback is appreciated. I'm PDtax.