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Do I need to pay capital gains taxes on my investment property If I sell it to my children? Would this fall under the gift tax rules?


Expert Matthew Peterson's Answer:

Based on the wording of the question, I am assumming the sales price of the property is greater than the basis (or purchase price) of the property because you are already indicating that there is a gain on the sale. If you are selling the investment property at its fair market value (ie what an unrelated purchaser would pay for the property), then you will have to pay capital gains taxes and there is no issue with gift tax regulations. However, if you are selling the investment property for less than fair market value, the difference between the fair market value and the price sold to a related party must be recognized as a gift to the related party.


For example, say you have property purchased for $5,000 (this is your basis). If the fair market value is $20,000 and the sale to the children is $9,000, a gift of $11,000 has been made to the children ($20,000 - $9,000) and capital gains tax will be paid on the gain of $4,000 ($9,000 - $5,000). If the gift amount is over the federal annual gift exclusion ($13,000 for 2011), then gift tax regulations go into effect and Form 709 needs to be completed and filed with the IRS.



Please consult with a tax professional for more details if it is determined that you need to file Form 709 or have additional questions.

Matthew Peterson, CPA


4 yrs experience

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