Depreciation recapture on gifted real estate

Must giftee pay IRS when property is later sold?

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Mar. 27, 2012

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Must giftee pay IRS when property is later sold?

Benny Kass
Inman News®

DEAR BENNY: In April 2001, a friend and I purchased a condo in California for $100,000. We are on title as tenants in common. My wife and I own 50 percent, and my friend owns 50 percent.

The loan is in my wife's and my name only. Because the property is now worth only about $50,000, my friend wants to turn the property over to me. We owe $67,000 on the mortgage.

My friend has paid half of all expenses and has taken depreciation on his tax returns. What if he quitclaims his half of the property to me? Am I responsible to pay back his depreciation when I sell the property? --Gary

DEAR GARY: No. Your friend is responsible for reclaiming only the depreciation he took on his tax return. If he gifts his half of the property to you by way of a quitclaim deed, his basis will be added to your basis for tax purposes.

You should, however, obtain legal and tax information about your specific situation, as I can provide only general advice.

DEAR BENNY: In May 2008, I signed a land contract on my home, thinking I had done a short sale and was no longer on the mortgage or on the deed or title to the home. However, a few months after signing the contract, I discovered that my name was still on the mortgage and on the title to the home. When I found out, I tried to find an attorney that would be able to help me, but I was unable to afford a lawyer. Help!--Mary

DEAR MARY: Years ago, when the farmhands who worked for ranchers out West wanted to buy an acre or two, they made a deal with the landowner/rancher. "I will buy the land for $100, and pay you $5 a month. You will put the deed to the property in escrow with a third party (a bank, an attorney, a title company). When I am able to pay the full $100, you will instruct that third party to release the deed and record it in my name."

This is called a "land installment sales contract," or a "land contract" or "contract for deed."

So, where is the party who is on that contract with you? I assume that the mortgage is being paid by someone, as there has been no foreclosure over the past four years.

Do you have a copy of that contract? Read it carefully; you may not be in trouble at all.

But, you really should get an attorney to review your documentation. If you cannot afford legal counsel, most cities (counties or states) have a bar association that can provide "pro bono" (i.e., free) legal services to persons who cannot afford to pay the attorney.

DEAR BENNY: In a recent Q-and-A, you wrote that a security deposit is not rent and thus if the tenant moved out without paying the last month's rent, the property manager is not entitled to a commission on that money. I have been a real estate broker and property manager for 40 years.

What about an instance in which the tenant left the apartment without paying the last month's rent, but there are no damages to the apartment and the landlord's letter to the tenant reads: "$1,000 of your $1,500 deposit has been retained for May rent. The balance of $500 is being returned to you, check enclosed."

The landlord is certainly receiving his rent for May; he's received rent for the whole 12 months of the lease and has not lost one penny. So why shouldn't the property manager receive his 10 percent of the May rent?

The landlord is even calling it "rent" in his letter to the tenant, and it's the fact that the lease and the law allow the deposit to cover any "unpaid rent" that allows the landlord to retain it. If he wasn't using it for "rent" and calling it "rent" in his letter to the tenant, he would not be allowed by law to retain it! He can't have it both ways -- either it's rent or it isn't!

If the whole deposit had to be used to pay for damages to the apartment, as stated in your Q-and-A, then there wouldn't be anything left over to cover unpaid "rent," and that's a different story. But when it's definitely used as "rent," I think the property manager should receive what he's due -- his 10 percent -- just as the landlord received what he was due (May rent).

I work with out-of-state landlords, so I'm usually the real estate agent who rents the apartment to begin with, and then I provide ongoing property management. So if you raise the point that the May rent wasn't really "collected" by the property manager -- in my case, yes it was.

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