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How to enter the transaction of transfering a property into an Irrevocable Trust on my taxes? It was a gift to my children.

Charleston, SC |

I lived in a condo in South Carolina for 5 years (purchase price of $72,000), and then rented it out for 6 years. Last October I had an attorney transfer the property into a Irrevocable Trust for my two older children. The property will no longer be rented. When doing my taxes the H&R Block program asks for the selling price, depreciation, etc. When I entered $0 it asked that I enter an amount. How do I figure the market value of the gift and what form number do I need to use for the transaction on my taxes. What is the best way to treat the transfer to avoid a large capital gain for my children when they sell it later on? I didn't get a Tax ID yet because there is no income from the Trust property. Paying taxes, H.O.A. fees etc. can I make personal checks to pay these expenses?

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Attorney answers 1


You gave the property away when you transferred it to the irrevocable trust for the benefit of your children. You did not sell it, so you do not enter any information on your income tax return with respect to the disposition of the property. The trust, however, is required to file its own for 1041 to report any income, expenses, depreciation, etc. The trust will start with a carryover basis from you, i.e., the basis in the property that you had on the date of tranfer. The form you use to report this transaction is Form 709- US Gift tax return. You should have had the property appraised by an independent qualified appraiser before you made the gift (that is how you figure out its fair market value). You need a tax id number for the trust even if there isn't any income from the property because you still need to depreciate the property. There is no way to avoid a large capital gain or depreciation recapture (ordinary income) to your children via the trust in the future because you have already transferred the property. You need to talk to your attorney ASAP with respect to future contributions to the trust for payment of the annual expenses. One primary reason for using an irrevocable trust is to avoid the inclusion of trust property in your taxable estate at your death. However, there are a slue of things you can do during your lifetime to mess that up and dealing with trust property like it is your own is one of them. At this point, though, the tax reporting obligations stem from the gift transfer and are not income tax related. If these questions are not within your attorney's specialty (which they really shouldn't be if he wrote an irrevocable trust for you), find an estate planning attorney.

This response contemplates only the laws of Ohio and is not intended to apply to other jurisdictions. None of the information in this response should be used or relied upon as legal advice or legal opinion about specific matters, facts, situations or issues. Viewing it does not establish an attorney-client relationship between you and Sherrille D. Akin, the law firm of Isaac, Brant, Ledman & Teetor LLP, or any of its individual attorneys



Thank you very much. Your advice was very helpful. I went to the IRS local office and they said they were not trained on this subject and suggested calling the 1-800 Business number. The agent told me not to answer yes on the H&R Block Program question, Did I sell, Transfer or Dispose of a Property in 2011? The agent was very helpful in walking me through the 509 Gift Tax Form. I ended up not having to pay gift tax and still have $1,700,800 left for my lifetime gift tax Unified exemption because I took the two $13,000 yearly exemptions for my 2 children each and deducted depreciation. She told me how my Trustees could get a Tax ID for the Trust on line instantly and said they didn't have to do anything else, unless they were planning to rent it out. My question to you, because I forgot to ask her was; Since the condo is considered having new owners after being transfered to the Trust and is not going to be a rental property any more, does depreciation have to be taken on a second home or personal vacation home that is in a Irrevocable Trust? If depreciation is suppose to be reported how do you compute it, what forms are used and when is it done. From what the agent said I don't think they won't have to depreciate it since it won't be used as a rental. Once they only rent it one time is it no longer considered a second home or vacation home? Again thank you. Your answer came just in time for me to complete my taxes and I didn't have to pay a large amount of money for a CPA. Your volunteering your service has benefited me greatly.