Tax on giving rental property as a gift

Generally,The rule governing the basis of gifted assets is commonly referred to as the carry-over basis rule.

Generally, property received as a gift are calculated with respect to the original owner's cost basis in the property. In other words, when property is given, the recipient receives both the property and the property's cost basis.

Any gift of depreciated property will trigger the so-called dual basis rules under Section 1015(a). 

Section 1015(a). This section states, in pertinent part, that for property acquired by gift, "the basis shall be the same as it would be in the hands of the donor...except that if such basis is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value."

http://taxmap.ntis.gov/taxmap/faqs/faq_10-001.htm

If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property.

When the property is transferred as a gift, while the previous owner is still alive, the previous owner's original basis is transferred to the new owner, who must apply the original basis when calculating the capital gains tax realized upon the new owner's eventual sale of the property.

Under federal gift tax rules, the recipient of a gift takes the donor's tax basis. So your capital gains tax basis will be whatever your mother's tax basis was immediately prior to the gift.

Here are specific answers to your specific questions, without going around your elbow to get to your thumb. 🙂

I understand that as donor my mother needs to file form 709 and pays zero tax because of the $5.45M gift limit. That 709 form is not too hard to do by hand in this case.

That is correct. The value of the gift she is giving you will be subtracted from her lifetime allowance of $5.45M that can be transferred to you with no tax consequences on her.

My mother also claimed depreciation on the rental property during the years under her ownership. My questions are:
Does my mother have to pay tax on the $80K profit/capital gain ($180-$100K)?

What capital gain? I think you are referring to the depreciation your mother has already taken on the property. The answer to your question is no, she does not recapture that depreciation or pay taxes on. You are the one as the recipient of the gift, that will pay taxes on it in the year you sell the property. When your mom gifted to the property, she gifted you everything associated with that property, to include all prior year's depreciation she has already taken.

Does all the depreciation now work back in her 2016 tax return to pay more tax?

Bottom line is, you are the one who will pay tax on that depreciation arleady taken. But you will not pay it until the tax year you sell the property. There are two ways to handle this is "your" tax return.

1) your mother gifts you her original cost basis in the property along with all the prior depreciation. Your cost basis on the property will be her cost basis *MINUS* all the depreication your mom took on the property while she owned it. This means your "in service" date will be one day after your mom reported it as given to you, and for "YOU" depreication starts all over for the next 27.5 years depreciation the new lower cost basis for you over the next 27.5 years.

2) Your mother gifts you her original cost basis int he property along with all prior depreciation. Your cost basis is "EXACTLY" the same has hers, your in-service date is EXACTLY the same as hers, and your prior depreciation already taken is EXACTLY the same as hers.

Overall, I highly recommend you select option 1) above.

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For your mom on her tax return, she needs to work through each individual asset one at a time and select the option for "I stopped using this asset in 2019". Then on the "Special Handling Required?" Screen she *must* select YES. If she selects NO then she will be asked for sales information, and the fact is she didn't sell anything.

Your mother will be entering a specific "date of disposition" for each asset, and that date should be the same for all assets.

If you elect option 1) above, then your date of acquisition/in-service must be one day "AFTER" your mom's date of disposition.

I am trying to gift a rental property to my parents. The property still has a mortgage on it but the bank will allow them to assume the loan.

So would this be consider part gift part sale? If part sale which portion am I selling to my parents? Say if my loan is 100k then would the price of the house be considered sold for 100k?  

The property was purchased for 150k and now its worth 250k.  I took about 40k of depreciation. So if my parents assumed the loan of 100k.  Wouldn't I have a net loss?  I know I can't claim loss on this but just want to make sure there isn't any taxable gain either.

Original Cost 150k - Depreciation 40k - Loan 100k (Sale portion)=(10k) net loss?  So does that mean I won't have any capital gains on this transfer?

Is my calculations above correct or at least in the ball park?

I know I need to report the gift part on form 709 which turbo tax doesn't support but how do I report the sale portion of the transaction in turbo tax?

Also for Form 709, what kind of supporting document I need for the Adequate Disclosure requirement?

As for the Fair Market Value, do I need a certified appraisal? or could I find recently sold houses around that area and get an average to use as the FMV?