Technical topics regarding tax preparation.
11-Aug-2022 5:09pm
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A rental was reported on H&W tax return on sch E.
H&W created 2 intentionally defective grantor trusts and each spouse gifted 50% ownership of the rental to IDGT.
Since a transfer to IDGT is disregarded for tax purposes, the rental will continue to be reported on H&W tax return.
Previously we got a P&L from the client to prepare schedule E.
This year, the client split the activities on 2 P&L's for the same rental, because they're looking at it as if 2 trusts now own half of the rental each.
Am I right to continue reporting the rental on 1 sch E. I'll combine client's 2 P&L's and will report on the same sch E as previously.
If the client insists on breaking up the rental to 2 sch E's are there any issues with that?
11-Aug-2022 5:35pm
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I'd do the two Schedule Es. It is no longer jointly owned.
11-Aug-2022 6:03pm
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sjrcpa wrote:I'd do the two Schedule Es. It is no longer jointly owned.
Thanks for the reply. Does the fact that H&W are CA residents (a community property state) and the properties are in CA change anything?
11-Aug-2022 6:50pm
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11-Aug-2022 7:24pm
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I think one Sch E. The IDGTs are disregarded for tax purposes, as you said. So it is as though they own the property as individuals.
15-Aug-2022 5:02pm
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I'm gonna also take a guess that there's likely a 709 filing requirement for the gift in trust. Other than estate tax purposes, I don't know why someone would give up their future step-up in basis by transferring the asset out of their estate.
15-Aug-2022 5:12pm
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15-Aug-2022 9:01pm
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That sounds like it could be a step in a good plan, assuming the gift was discounted and the IDGT has an exchange clause.
Steve
16-Aug-2022 12:25pm
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gatortaxguy wrote:That sounds like it could be a step in a good plan, assuming the gift was discounted and the IDGT has an exchange clause.
Good idea. Possibly the plan would be to discount the gift of the house which would be expected to continue to increase greatly in value over their lifetime, then prior to death swap the appreciated house for an equal value of cash, get a full step-up and keep that appreciated value out of the estate with high basis assets where losing the step-up wouldn't matter.
19-Aug-2022 12:36pm
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OP here.
Gift returns were filed. The purpose of putting the rental into IDGT was for estate planning purpose. Children will inherit the property eventually. The attorney came back on this and said that prior to the IDGT transfer the ownership was split up from community property to 50/50 TIC with H&W, then 2 IDGT were created for H&W and interests transferred there.
I will be splitting up the property on the return and reporting on 2 schedules E.
The property was valued higher on the gift returns vs adjusted cost basis, but I believe no basis step up on the income tax return since the transfers are disregarded for income tax purpose?
19-Aug-2022 12:45pm
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There's never a step up in basis for gifted property. The gift is reported on the gift tax return at FMV and eats up that amount of lifetime exemption, though.
19-Aug-2022 1:39pm
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sjrcpa wrote:There's never a step up in basis for gifted property. The gift is reported on the gift tax return at FMV and eats up that amount of lifetime exemption, though.
That's right. Thanks for confirming this.
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