Originally Posted by Wacasama
Thank you for your response. It makes sense. However, the basis of the question remains unclear. Given the fact that the original ownership was the result of gifting, doesnt that come into significance with regard to capital gains tax exposure?
very critical question donot think the gifting comes into significance with regard to CG tax exposure itself;HOWEVER,it does in determining capital gain amount. When the cottage was gifted to you, your income tax basis in the property became the same as the person who made the gift to you ,the donor. since you received it by gift, you need to take the basis of the person who gave you the asset.
To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it if any but mosty no gift tax imposed. If the FMV of the property was less than the donor's adjusted basis, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustment to basis during the period you held the property. Your basis for loss on its sale or other disposition is the FMV at the time you received the gift plus or minus any required adjustment to basis during the period you held the property. If the FMV of the property was equal to or greater than the donor's adjusted basis, your basis for gain or loss on its sale or other disposition is the same as the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of the gift tax paid, depending on the date of the gift. So,Once you determine the cost basis as above, You will determine gain ;Your pro-rata share of Amount realized(Sales - Expenses on sales) minus Your pro-rata share of Adjusted cost basis (cost basis determined above plus any cost of improvements to the property etc).
I would assume that the FMV on the date of the gift will be higher than the cost basis of the donor, considering the property prices.
If that's the case than the cost basis will be donors basis + all or part of gift tax paid, if any + improvements made by you after the house was signed over to us and the time of sale.