Tax implications when gifting a NYC coop?

You need to speak with an accountant and lawyer. There are ways to loan your child money to purchase the coop from you and then for you to forgive the loan in increments over a period of years. To avoid a taxable moment and to avoid the transaction from affecting the amount your estate can pass on without taxes, you need counsel from people who understand the details of your situation.

Do not overlook that when the actual transfer of the stock certificate and proprietary lease is to occur, the coop will need to approve your child as it would any applicant seeking to become a shareholder. Coop shares come with restrictions and aren't freely transferable to a new owner.

Thanks Kyle. Can you recommend an accountant and lawyer?

If a parent is considering doing this, I would think they have the means and resources that would suggest they already have an accountant. And the parent should have testmentary documents (will, trusts if application) set up via a lawyer. If neither is the case, this parent is not yet in a position to do all this. They first need to speak with an independent financial advisor about overall financial planning and retirement. Ask around to friends, coworkers, family who are likely to have such an advisor, lawyer, accountant in their lives. DO NOT use an advisor at the bank or a particular mutual fund company. They must be completely independent or you'll get advice skewed by the products the person's company/bank offers.

If you want to consult with an accountant, I'd recommend our CPA, Mark Kornspan in Chelsea -- we've used him for over a decade, and have often referred him to family and friends who have been very pleased.

his email is: mkotax [at] aol [dot} com.

and you can tell him Ali Rogers sent you.

The rules regarding gift & estate taxes are ever-changing, so speaking with an accountant is a good idea. However, it is also helpful to get actual info here so you don't go in clueless. You should search for "gift tax" and "estate tax" in Google to get familiar.

So here are the rules through 2012, at which point they revert to some other set of rules unless Congress takes action. I may be wrong on some of the items, so do your own research and verify with an accountant.

Each year, each person may give every other person a $13K gift without any tax implications. So, if you have a spouse and your child has a spouse, you can gift up to $52K a year. Kylewest's suggestion was this route: you sell the apt to your child while simultaneously loaning him the full amount. Then, you forgive $52K a year of that loan's principal and interest each year. Note that under this route, you would be subject to capital gains on the sale if there has been appreciation.

If you go beyond the $13K limit, then you start eating into your $5M lifetime gift tax exclusion limit. Over your lifetime, you may gift away up to $5M beyond the annual $13K amount without being subject to the gift tax. This gift is per-person, so combined with your spouse's, you have a total of $10M, and this amount is "portable" between spouses meaning that if one of you dies, the other's limit is bumped up by the unused portion. The recipient of the gift will have a tax basis of whatever you paid for it (assuming it had appreciated under your ownership). This means that if you bought for $300K, gifted when it was worth $600K, and your child sold at $800K, your child would be subject to $500K in capital gains taxes.

Now the use of your gift tax exclusion limit eats into your $5M estate tax exclusion limit. Another option for you is to just have your child inherit the apt. The upside here is that the tax basis for your child is not the amount you paid, but rather the fair market value at your death. So in the example above, it'd have been $600K and only $200K in capital gains would be subject to taxes by him. The downside of this approach is that assets tend to appreciate over time, so gifting now makes better use of the $5M.

So, a lot depends on your specific circumstances. If you gave the rough value of the apt, what you paid for it, your age, and whether or not you / your child have spouses, then something more specific could be said. At least until 2012 when it'll all change, no doubt.

But, don't go into an estate planner's office without doing your own research. I have found people to come out of those with extremely poor understanding, and in some cases, extremely poor advice.

Calculating basis of property gifted:

http://www.irs.gov/publications/p17/ch13.html

Just note that the some of the rules might have changed as that's a 2010 publication.

agree, rules change constantly. The portability thing is new.

inonada. if the parents forgive the $52000 a year in interest would you know if the parents avoid recording the interest as income on their tax return? and if the children don't record interest expense on their return? does the irs view it as your giving the children 52000 and they give it back to you as payment of interest. thanks

inonada -- paid $245,000 all cash this year, Spouse and I are 54. Child is single.

front porch -- thank you I will definitely contact him.

Opheus12, I actually looked this up recently.

Generally, the IRS publishes "applicable federal rates" (AFR) which determine the minimum interest that is to be charged on loans depending on the term of the loan. Any interest charged below this amount is considered interest paid, but then given back. So, the lender owes taxes on that amount, and the give-back is dealt with according to the nature of the give-back.

What you are stating here is called a gift loan by the IRS, where the nature of the gift is the forgoing of interest. Generally, the lender would owe taxes on the amount of interest below the AFR. However, two exceptions are made for gift loans. First, if the loan amount is below $10K, the interest income taxes are waived. Second, if the loan is below $100K, then the interest income is capped by the _borrower's_ net investment income (interest, dividends, royalties, short-term cap gains, and long-term cap gains if 15% rate is waived); if the borrower's net investment income is below $1000, then for the purposes of this exception it is assumed to be 0.

So, generally the forgone interest needs to have taxes paid on it, but for gift loans of lesser size, an exception is made.

Waiver: I am not an accountant, just some guy who spends time looking at IRS publications as a hobby. Read “Below-Market Loans” in IRS Publication 550 (http://www.irs.gov/pub/irs-pdf/p550.pdf) to get it from the horse's mouth.

inonada. that's very helpful. thank you. i guess it follows that if some of the interest needs to be recorded than it should be in the form of mortgage interest so that the children can deduct it on their return. thanks again.

ChrisT, then it seems like Kylewest's suggested strategy should work fine as you'll be able to gift the whole thing in a decade or so without eating into your lifetime exclusion limit. Because there has been no appreciation, there is no tax basis step up to try to take advantage of with inheritance vs. gift either. Besides, you'd want to gift it now rather than in 50 years when you die and its value has reached $1250K or whatever.

That being said, unless you will have millions in assets by the time you die, gifting the whole thing now probably won't have a negative consequence down the line. So, you should spend too much setting up a loan-payback setup, but I can't imagine that costing much. All you need is a loan document stating the amount of the loan, the payback schedule, and annual statements that an amount has been forgiven.

The downside of a loan-payback setup is that you'll owe interest taxes on the $245K. Current rates for mid-term loans (3-9 years) are 2.44%; 9+ year loans are at 4.19%. So if you squeeze it into 9 years, you'd owe taxes on $6K of interest the first year, going down to $0 smoothly over the 9 years if your child has decent investment income, or stopping suddendly at year 5-6 if he/she doesn't. For a loan longer than 9 years, it'll be taxes on $10K in interest. All-in-all, maybe $10-20K out of pocket depending on your tax bracket.

So, maybe just doing a straight gift and eating into your lifetime limit will be your best choice, particularly if you're not planning on leaving behind a large inheritance.

As stated before, I'm just some amateur with limited understanding, so discuss what I said with a professional before making conclusions.

"inonada. that's very helpful. thank you. i guess it follows that if some of the interest needs to be recorded than it should be in the form of mortgage interest so that the children can deduct it on their return. thanks again."

Good point: that would make sense, but you've reached the limits of my IRS knowledge, and "makes sense" & tax law don't always correspond.

ChrisT, another item to discuss & consider with your accountant: whether the interest on taxes you pay will be offset by a deduction on your child's side, both legally & practically (i.e., does he/she itemize on federal and/or state, because you'll owe interest income taxes on both).