I do know here in Florida you can’t sell a high dollar item like a car for a $1. The State knows the rough value of the vehicle and will tax on that. You can’t cheat the government out of its share. :dubious:
Gifts to your child can be subject to gift tax. I believe that one of the motivations for the gift tax was to close a loophole in the estate tax. If there were no tax on gifts, a person could get around the estate tax simply by signing over everything to their kids before they died. As it stands now, once you go over the annual exclusion, whatever you give reduces the amount that you can leave in your estate tax-free.
As for the $1 sale, they thought of that already. IRC Section 2512(b). If, let’s say, you sold a house whose FMV was $100,000 to your kid for $1, that would be taxed (for gift tax purposes) as if you had made a $99,999 gift to your kid.
I can’t find an example right now, but there is a real estate agent who has a syndicated column published in the real estate section of several newspapers who sometimes answers alleged reader questions. One of the questions he/she has answered is what happens if I sell my house to my kid for $1. He/she goes into a diatribe about how you shouldn’t do this because if your kid then turns around and immediately sells, they will owe tax on a capital gain of $99,999. Never take tax advice from a real estate agent. If you are really interested, refer to Treas Reg Sec 1.1015-4 for how to compute the kid’s basis.
Manda JO, you’re welcome. Glad I could help.
Wrong.
Right.
Also a good Tax attorney can set up some trusts, etc and you can move more gifts that way.
The issues with an artificial sale price have been well addressed, and obviously, gift tax issues apply if there is no sale.
One strategy though… there can be a seller-financed sale. i.e. kids get the house at $200,000 (or whatever) along with a $200,000 mortgage owned by the parents. The kids must make payments and the IRS does mandate certain minimum amounts of interest. However, the parents can make the mortgage pretty short-lived by giving the kids money and having the kids use it to pay off the mortgage. Thus, $13k/person/year is used to pay down the mortgage. The end result is a pretty darn small amount of interest is reported (it could easily be less than $1,000 of interest over the handful of years required to clear the mortgage in the example, but the number of spouses involved changes the amount of time to get it all done with).
Another interesting difference in US and Canadian tax law, is that Canadians do not pay capital gains taxes on their primary dwelling. (With all the interesting legal minutae attached to any law). However, Canadians also do not get a tax break on mortagage insurance. As a result, there is much less incentive to re-mortgage and stronger incentive to pay off a mortgage. Consequently, Canada has avoided much of the meltdown that hit the USA in the last few years.
If you sell a house to Joe (the plumber?) for $1 then you lost money on the house and Joe is taking on a massive capital gain liability if he sells the house. I guess the question is what the IRS will think of someone trying to claim a $400,000 loss on a house with a fair market value of $600,000, for example. If they think you are just dodging taxes, will they make you pay taxes on the fair market value?
I know that Canadian provinces, like the states mentioned above, will apply the “gold book value” of a car if they think it was resold with a lower than market value. This gets around the old dodge of someone writing a sales receipt for a number lower than they received, to avoid paying the sales tax at registration. Not sure what happens with houses. DO some US jurisdictions have additional taxes on house sales, over and beyond the capital gains on the profit?
For most USA dudes, there is no tax for a sale of your primary residence. YMMV, of course.
My SO and I have had this discussion, usually while on a road trip. First it was “We’ll help everyone pay off their college loans.” Then came “We could make payments towards their mortgages”. Now we’re getting into “We could set up college funds for their kids”.
One thing I’ve joked about with our friends is, if they ever get a phone call from me that says “send me a dollar”, they should just send one and don’t ask any questions. If we ever win the lottery, I’m going to claim it was bought out of a long term group lottery pool. That way, the money only gets taxed once, as a lottery winning; not a second time as a gift.
Is this possible?
Say you win a big lottery pot, $100 after taxes and discount. Before taking the money you go to a tax lawyer and set it up as if you, your family, some friends, charities, or whatever had made a deal to share if anyone won.
You get half and the rest is to be divided among the others.
At this point there would be no additional taxes of any sort to pay.
So, does this fly?
Okay, I see after posting that Tastes of Chocolate had much the same idea.
I’m loving the optimism that not only thinks “Hey, I COULD win someday…” but goes so far as to make specific plans for the winnings and even worry about the taxes.
“Why so down?”
“Well, when I win the lottery, I’m planning on helping my uncle finish building his dream house, but my other uncle has always wanted to finish his PhD. and I’m afraid of showing favoritism… and the taxes! Don’t even get me started…”
The law basically requires that the agreement or partnership to share the winnings had to be in place before the ticket was purchased. To have a solid case, it would be good to have a written partnership agreement in place before the ticket was purchased that spells out exactly who pays how much for the tickets and how any winnings are to be divided. Anything less and you are going to hope to convince the IRS and then a Tax Court judge of what happened.
A partnership formed after you win is not going to matter. The lottery commission may agree to pay out to the partnership, but the IRS is going to have other ideas. Now, an ethical attorney is not going to help you forge or post-date documents, but could help you memorialize what you claim to be an existing partnership in writing and may advise you on what evidence to gather to substantiate your claim that the partnership existed before the ticket was purchased. Fortunately, the law in many states does not require that a partnership be put in writing. The Tax Court is going to look at all the facts and circumstances surrounding the case, how the parties acted, how they handled previous lottery tickets, what explicit understandings they had and how the money was handled. That’s a fancy way of saying, it will depend on whether the Tax Court judge believes you are not.
The case everyone cites is Estate of Winkler v Commissioner, T.C. Memo 1997-4. Mrs. Winkler won the lottery. The Winklers claimed they had an unwritten understanding that the prize would be split 25% to each of the parents and 10% to each of the children. This was put into writing after the ticket won. The Court heard testimony that the family would regularly gather and whoever had a dollar bill would buy a ticket and Mrs. Winkler would put it into a fishbowl where other family documents were kept with the understanding that they belonged to the whole family.
The Tax Court noted that the law of the state where the Winklers resided did not require that this type of partnership be put in writing and it accepted their claim that a partnership existed at the time the ticket was purchased. However, the Court rejected their after-the-fact partnership agreement that split up the winnings 25% to the parents and 10% to the kids. The Court found that the law required the ownership of the winnings to be split equally between the partners where a written agreement was not in force when the ticket was purchased.
Since the Winklers had over-reported their winnings, the Court found there was no tax deficiency. The children were not parties to this case, so I don’t know what happened to them.
So, the law requires that a partnership be in place at the time of the purchase. People don’t usually plan that far in advance, so there is usually a mad scramble to gather evidence after-the-fact to prove the existence of a partnership. Whatever agreements you enter into after-the-fact (assuming you don’t falsify documents), have no bearing on the tax treatment of the winnings.
In the United States, until 1997 you could avoid (actually defer) capital gains on the sale of your home by rolling over the proceeds into the purchase of a new home. I am willing to speculate that a majority of Americans are not yet aware that this provision of the tax law has been repealed.
But as of 1997, it is possible to have up to $250,000 ($500,000 for a married couple filing jointly) of completely tax-free gains on the sale of your primary personal residence if certain minimum ownership and residency requirements are met. With some exceptions, you need to have owned the residence and used it as your primary residence for two of the five years preceding the sale. No capital loss is allowed on the sale of a personal-use asset, including your residence.
In the example you cite, the IRS will have an opinion on whether it was simply a bad business deal or a large gift to Joe. And, of course, if you disagree with their opinion, you can ask a court for its opinion. In the case where a transaction is deemed to be part sale and part gift (for example, you sell a house worth $600,000 for $200,000), the law allows no capital loss to be claimed. You can present evidence about your intentions in making the sale, sudden drops in the real estate market, your relationship with Joe, the manner of making the sale, and so on. The Court will consider the law and the facts and circumstances surrounding the transaction.
Hmmm…
Once in a while you see lawsuits in the opposite direction. Fred wins the lottery and Joe says “we had a verbal agreement that we would give each other 10% if either of us won the lottery.” My favorite is where someone misses out on the workplace lottery pool and says “we had an agreement that if I owed for a week or two, Sally would cover it and I’m still in”. In a discussion beaten to death in an earlier thread - the worst was the group that would plow back to $10 winners and such into the pool; IIRC it was in Montreal a group won $50M split 30 ways (no taxes!!) and another 19 claimed since they had contributed to other earlier small winner tickets, they owned a share too. That held up the payout for several weeks.
I’m sure the first red flag for any IRS investigation would be an agreement where one person/couple neds up with most of the prize and a few others get 5% or 10%. That sounds more like an attempt to evade gift taxes than a real agreement.
This is completely untrue.
But there is a $250,000 capital gains exemption if you have lived in the home 2 of the previous 5 years. As most people don’t realize a $250,000 profit from the sale of their home and usually live in their primary residence for more than 2 years, it doesn’t often come up (link to relevant IRS article).
You still usually have to declare any capital gains from the sale, even if you’re under the exemption.
There are ways to help out your family without putting property in their name. You could, for example, purchase a second house in your name and then hire your sister as a caretaker of the property.
Similarly your parents could drive a car leased in your name without tax complications.
In both these cases, and in others discussed, I’d suggest consulting with a good Tax Professional, such as a CPA.