Foreign property gift

Question

My mother lived in UK and was a British citizen. A few years ago she was concerned that she would have to live in a care home, and in that case her home would have been sold by the government to pay her care fees. Her lawyer persuaded her to sign the deed over to my name to prevent this (making it a gift to me). I am a US citizen, and reside in USA. My mother had a legal agreement drawn up which stated that she had a lifetime right of abode at the address and that I could not sell it or charge her rent. The lawyers also retained the title deeds until her death. They registered the name change with the land office but the security was retained by them and not discharged until after her death (not sure what that actually means).

I am not sure about the gains tax. Do I need to use the date of ownershio change, or the date I was legally able to take physical possesion and my right to sell? This makes quiet a difference in the gains tax. I did see some other articles which said this situation could be treated as an inheritance instead of a gift?

bryan62 · Accepted Answer

@bryan62 you should be able to TurboTax that acquisition by gift has "Donor's basis" of UKL of XXXX. Turbo should be asking you the basis of the donor when you tell the asset was acquired by gift.

Are you using the desktop version or on-line version ( I don't know the on-line version at all )? In the desktop version you can always go the forms mode and enter the amount directly.

I have found out the answer for this scenario.

It should be entered as inheritance. I will explain why below.

You enter the Aquisition date as date of death (not the date the property was transferred). Enter the FMV (full market value) of the property at time of Aquisition, which is known as using the step-up basis rule.

You are probably thinking...how is this possible when the property was transferred at an earlier date, and so isn't that a gift?

Well, its to do with property transfers with retained life estates and their implications on the gross estate. This is Internal Revenue Code Section (I.R.C. §) 2036 which outlines the rules regarding property transfers where the decedent retains a beneficial interest lasting for the rest of their life.

Here are the key points:

Definition: When a person transfers property as a gift (without adequate and full consideration in money or money’s worth) but retains a beneficial interest in that property for their lifetime, it falls under I.R.C. §2036.
Inclusion in Gross Estate: The value of such property is included in the decedent’s gross estatefor estate tax purposes. In other words, even though the decedent legally no longer owns the property, it is still considered part of their estate.
Examples:

The rule also applies to situations where the decedent retains benefits substantially akin to outright ownership, such as the right to physical use and enjoyment of the property or the right to designate another party who will ultimately receive outright ownership or income during the donor’s lifetime.

So, basically, if you have person who made the property transfer retains a life estate in the property (usually an agreement drawn up by the 2 parties by a lawyer which prohibits sale and completed gift until death) then this is then regarded as part of the GROSS ESTATE. Now normally assets in the gross estate go through probate so debts can be paid and the will is administered. However. a property with a life estate (while part of the gross estate) will skip the probate process and the bequest will be effective on date of death. Therefore it's an inherited asset. Maybe that's why you can't enter the FMV in the gift part of online s/w.

That's my understanding...hope it helps.

Vanessa A · Answer

Did you sell the property? If not, then there wouldn't be any gains on the property

If you did sell it, then the gift would not be considered complete until the day you had control over the house. So, the day you gained control over the house is the day you would use for the FMV of the house.

You will also need to determine your mothers basis in the house to determine what your actual gain is on the sale.

If the FMV of the property at the time the donor made the gift is less than the donor's adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property.

Your adjusted basis for figuring a gain is the donor's adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
Your adjusted basis for figuring a loss is the FMV of the property at the time the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
Note: If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property. What is the basis of property received as a gift?

When a Gift is Not a Gift