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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29576
Experience:  Taxes, Immigration, Labor Relations
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Noreen Ramsay.I was gifted a small home from my Mother

Customer Question

Customer: Noreen Ramsay.I was gifted a small home from my Mother before she died in 1994. I have rented it out and just sold it for $48,000.00 with $24,000. still owing me. Had to do a lot of cleaning and repair work before sale. What tax forms do I need?
JA: Thanks. Can you give me any more details about your issue?
Customer: I just want to be sure to claim what is deductible in expenses and report the profits.
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Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

There are several steps before you report the sale transaction..

You need to determine

1. your original basis. The basis on gifted property is the lesser of donor's basis and fair market value at the time of gifting - both are back in 1994.

2. adjusted basis by adding all improvement expenses paid during these years - do not add repair expenses that were deducted when paid in previous years.

3. accumulated depreciation for years the property was rented. Residential rentals are depreciated over 27.5 years - so I assume the basis was largely depreciated.

4. additional expenses paid to prepare the property for sale and sale expenses are added to the basis.

Then you report the sale transaction.

We need to be clear if you realized a gain on that sale.

If you do realize a gain - that gain will be taxable.

However - we need to verify if you correctly calculated the gain.

That is $48,000 (selling price) MINUS (adjusted basis)

The mortgage amount you might pay out of proceeds is not relevant.

To report the sale transaction - use form 4797 - report as separate items - the land and the building.

Use part I because you held the property more than a year

In part III - report that sale transaction as section 1250 property.


You mentioned - with $24,000. still owing me - please clarify if you provided financing ?

If yes - you might qualify for the installment reporting method.

Let me know if any additional details needed.

Customer: replied 1 year ago.
R/E tax in 1995 was $30,000.00. Claimed expenses yearly, did not do depreciation. (don't know how) I had about $4000 expenses. Since I did not pay for it , I'm thinking I had a gain except for those expenses(??)
Customer: replied 1 year ago.
I am getting a monthly payment for the remainder until he comes up with the full amount.
Expert:  Lev replied 1 year ago.

If you did not claim depreciation in ANY of precious years - there is an option to claim the full amount in the year of sale.

Form 3115 is used to change accounting method.

You may file from 3115 now to change an accounting method and claim all missed depreciation in THIS tax year.

In this case - most likely you will need a help from a local CPA to prepare your return.

Most important - you need to determine your basis.

Because the property was gifted - you need to know your mother's basis. If your mother purchased the property - that is her purchase price.

Expert:  Lev replied 1 year ago.

Here is an additional information about your owner financing as we discussed.
An installment sale is a sale of property where you will receive at least one payment after the tax year in which the sale occurs. You are required to report gain on an installment sale under the installment method unless you "elect out" on or before the due date for filing your tax return (including extensions) for the year of the sale.
For installment sale - you generally will use an installment reporting method - but you may opt out and report the total income as received in the year of the sale.
You will find reporting requirements and examples in the IRS publication 537 -
Use Form 6252 , Installment Sale Income, to report an installment sale in the year the sale occurs and for each year you receive an installment payment.
You report interest on an installment sale as ordinary income in the same manner as any other interest income. If the installment sales contract does not provide for adequate stated interest, part of the stated principal may be recharacterized as imputed interest or as interest under the original issue discount rules, even if you have a loss.You must use the applicable federal rate (AFR) to figure the unstated interest on the sale.
All these will make your tax return a little more complicated than you might expect.

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