Welcome Guest. Register Now!  



Reply
 
LinkBack Thread Tools Search this Thread Display Modes
  #1 (permalink)  
Old 07-06-2017, 09:50 PM
Junior Member
 
Join Date: Jul 2017
Posts: 3
Question about Income Tax on the Sale of a Rental Property That Has Been Transferred between Spouses

This question is about federal income tax on the sale of a rental property, in a situation when the property ownership has been transferred between spouses.

The situation in question involves a married couple; let's call them Alice and Bob. They always file a joint tax return (Form 1040).

Bob purchased a rental property for $150,000. He was the sole owner, and he held (and rented out) this property for five years. Every year, he was deducting straight-line depreciation (on his joint tax return with Alice, Form 1040), which was $5,455 per year, and thus he deducted $27,275 total over five years.

After five years, Bob transferred the ownership of that rental property to Alice through "quitclaim deed", and Alice became the sole owner of that rental property. Then, Alice sold it for $220,000 (before the commissions), and paid $20,000 sales commissions. According to Form 1099-S generated during the sale, Alice received $220,000 of the sales proceeds (before the commissions).

How should Alice and Bob report the income from the sale of that property?

Can they simply calculate their joint income as

$220,000 (sale) - $20,000 (commission) - $150,000 (purchase)
+ $27,275 (previously deducted depreciation)

Or should they report their income as two separate taxable transactions:

(1) The sale by Bob to Alice for $0, which resulted in the LOSS of
$150,000 (purchase) - $27,275 (previously deducted depreciation)

(2) The sale by Alice for $220,000, which resulted in the PROFIT of
$220,000 (sale) - $20,000 (commission)

Please help. Thank you.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #2 (permalink)  
Old 07-07-2017, 10:05 PM
Moderator
 
Join Date: Oct 2010
Posts: 4,838
How should Alice and Bob report the income from the sale of that property? ===>As you know they may report it on their MFJ o r MFS return.

Can they simply calculate their joint income as

$220,000 (sale) - $20,000 (commission) - $150,000 (purchase)
+ $27,275 (previously deducted depreciation)====> When THEY sell the rental property, they?ll have to pay tax on any gain (profit) they earn;they need to recaputure the unrecap sec 1250 unrecap depreciation as regular income taxed at their regular tax rate on their return.I mean$27275 of $70K gain needs to be reported as regular income taxed T REGUALR TAX RATE. As you can see, when you sell your property, you effectively give back the depreciation deductions you took on it. Since they reduce your adjusted basis, they increase your taxable gain. Thus, their taxable gain was increased by the $27275in depreciation deductions they took. The amount of their gain attributable to the depreciation deductions they took in prior years is taxed at a single 25% rate aslognas their tax rate is 25% OR HIGHEER. for example, they would have to pay a 25% tax on the $27275 in depreciation deductions they received. The remaining gain on the sale is taxed at capital gains rates (usually 0%, 15%, 20% for taxpayers in the top tax bracket

Or should they report their income as two separate taxable transactions:

(1) The sale by Bob to Alice for $0, which resulted in the LOSS of
$150,000 (purchase) - $27,275 (previously deducted depreciation)

(2) The sale by Alice for $220,000, which resulted in the PROFIT of
$220,000 (sale) - $20,000 (commission)==========>> as said they may report their income as MFJ or MFS on their return.when they file MFS, then only the spouse receiving the rental pty needs to report the gain on her MFS return.Quitclaim deeds are not taxable when they transfer ownership to a spouse. Many quitclaims are done to allow a spouse ownership. This often takes places during a divorce settlement. You can then claim the rental income on your joint return.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #3 (permalink)  
Old 07-23-2017, 12:33 AM
Junior Member
 
Join Date: Jul 2017
Posts: 3
Dear Wnhough:

Thank you so much for the detailed reply. I have a follow-up question, to make sure that I fully understand the tax implications of this situation.

Suppose that the situation is as described in my original posting; in particular, Alice and Bob are a married couple, and they file a joint tax return (MFJ). Could I ask you to confirm that the transfer of the rental property from Bob to Alice does not affect their taxes, and that they do not need to report this property transfer to IRS at all?

Also, could I ask you to confirm that, if Bob purchased the property, transferred it to Alice, and then Alice sold it, then they need to report only one sale (by Alice)?

In particular, if Bob owned the property for five years, then transferred it to Alice, and then Alice sold it in less then a year after the transfer, is their income considered a capital gain on a long-term investment (even though Alice held the property less than a year after the transfer from Bob)?

Thank you again for your help.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #4 (permalink)  
Old 07-23-2017, 01:46 AM
Moderator
 
Join Date: Oct 2010
Posts: 4,838
Quote:
Originally Posted by jane239 View Post
Dear Wnhough:

Thank you so much for the detailed reply. I have a follow-up question, to make sure that I fully understand the tax implications of this situation.

Suppose that the situation is as described in my original posting; in particular, Alice and Bob are a married couple, and they file a joint tax return (MFJ). Could I ask you to confirm that the transfer of the rental property from Bob to Alice does not affect their taxes, and that they do not need to report this property transfer to IRS at all?

Also, could I ask you to confirm that, if Bob purchased the property, transferred it to Alice, and then Alice sold it, then they need to report only one sale (by Alice)?

In particular, if Bob owned the property for five years, then transferred it to Alice, and then Alice sold it in less then a year after the transfer, is their income considered a capital gain on a long-term investment (even though Alice held the property less than a year after the transfer from Bob)?

Thank you again for your help.
Suppose that the situation is as described in my original posting; in particular, Alice and Bob are a married couple, and they file a joint tax return (MFJ). Could I ask you to confirm that the transfer of the rental property from Bob to Alice does not affect their taxes, and that they do not need to report this property transfer to IRS at all?=======>>when you sell a primary home, If reported, it is reported for the tax return of the year of sale. However, it may not even be reported.I mean For the sale of a residence, up to $250k ($500k on a joint return where you both lived in the residence) of gain can be excluded from income if you lived in and owned the house for 2 of the last 5 years. However, The IRS considers rental property to be business property, so you can't just report the gain or loss on your Form 1040. You must also complete and file IRS Form 4797.If your rental property is a home, it's a Section 1250 property, so you must complete Part III of the form to determine if you have a gain. Then enter the resulting number on line 32 on line 6 of Part I. If you can get past Form 4797, the sailing becomes a little smoother. You must also file Sch D with your return. If you reported a gain in Part 1 of your Form 4797, transfer that number to line 11 of Sch D as a long-term capital gain. After you complete Schedule D, the resulting number goes on line 14 of your Form 1040


Also, could I ask you to confirm that, if Bob purchased the property, transferred it to Alice, and then Alice sold it, then they need to report only one sale (by Alice)?======>>I guess it depends; When a property is given specifically as a gift, though, a gift deed is issued. One of the requirements of a gift deed is that there be no monetary transaction. Quitclaim deeds, however, can be filed with or without a monetary transaction. If there is one, it must be reported, and there are tax implications. A quit claim deed is as good as any other deed in conveying title from one person to another. The only real difference between the deeds is in a quit claim deed the former owner transfers whatever ownership and interest in the land that he or she owns. If that owner owns a 50 percent interest, he or she only transfers 50 percent interest. And with a quit claim deed, you can?t go back to the seller and claim he represented anything with respect to the transfer of the land

In particular, if Bob owned the property for five years, then transferred it to Alice, and then Alice sold it in less then a year after the transfer, is their income considered a capital gain on a long-term investment (even though Alice held the property less than a year after the transfer from Bob)?=========>>then the income from the sale of the rental home must be both regular income home for less than 12 months, the gain will be a short-term capital gain. Short-term capital gains do not benefit from any special tax rate ? they are taxed at the same rate as your ordinary income.When you sell rental property, you?ll have to pay tax on any gain (profit) you earn (?realize,? in tax lingo). If you lose money, you?ll be able to deduct the loss, subject to important limitations



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
Ads
Reply


Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

vB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Rental property sale for gain; question on Tax filing harsha55 Rental Real-Estate 0 04-12-2017 03:39 PM
Rental property sale with no income/2 homes sold FROSTBYTE3964 For 2016 1 01-10-2017 03:43 PM
Earned income rental property question pinkchrissy Income 1 03-12-2016 07:11 PM
Income exceeds $150,000. Why doesn't Turbotax offset passive losses from one rental property against passive income from second rental property? aboniadi Rental Real-Estate 4 03-17-2014 02:15 AM
Can Suspended Losses from Rental Property converted to Personal Residence be released upon sale of another rental property? mountainaire Rental Real-Estate 1 04-05-2011 03:59 AM

Follow us on Facebook Follow us on Twitter Google Buzz Rss Feeds

» Categories
 
Individual
 » Income
 » IRA/Sep
 » Medical
 
Corporations
 » Payroll
 
Forum for CPAs
 
Financial Planning