Etienne wrote:

- quote -

It's not a gift because they really didn't have anything to
give away. They paid nothing for their title in the
property, and it wasn't meant to be a gift to them. You
can't give away what you don't actually own, even though you
are the techical legal owner.

- quote -

They probably won't know about it unless they get suspicious
and start looking into it.

Stu

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- quote -

Numerous clients (Washington state) have told me that
mortgage companies will not accept "co-signers" or
"guarantors" in the strict legal sense of those terms.
Rather, they insist that such persons must be named on the
property title and treated as "co-borrowers." This,
obviously, leads to the problem of people who ~appear~ on
the surface to be "owners," but who were never intended as
such.

In an effort to demystify this, I've often seen the
quitclaim deeds that add (or remove) such people labeled as
"assignment (or release) of security interest," or sometimes
simply "for financing purposes only."

MTW

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"Stuart Bronstein" <spamtrap[at]lexregia.com> wrote:
- quote -

Interesting twist, thank you.

I really don't know why adding the names would have
increased increase chances of getting the loan, except
maybe meeting some income to montly mortgage payment ratio.

They were really just added to the title (and mortgage) to
'get the loan', acting as co-signers. On the title document
they all show as 'joint tenants' however, not showing that
they are just co-signing. And they actually lived, and one
of them still lives in the proporty.

I just wonder if they IRS will be OK with this
'non-gift'-intent. IRS talks about anything given of value
for nothing in exchange, even if not intended as a gift.

Also, I am curious how and when IRS will know about the
quitclaims in the first place. Would they receive some sort
of report from the County; or are records compared when the
property is eventually sold?

-Etienne

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Seth Breidbart wrote:
- quote -

Depends on what you mean. If two people are married to each
other and make gifts to the same person, their exemptions do
not double.

What really happens is that when a married person makes a
gift and his spouse does not participate in the gift, he can
elect to have the gift treated as given half by each spouse.

Stu

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MTW wrote:
- quote -

Excellent analysis. And if they gave no consideration for
their names on the title, taking their names off title
should not be considered a taxable gift or taxable income in
any way.

- quote -

Those are legal terms with specific legal meanings. As a
result they would not come within those definitions if they
were added to the title of property for the purpose of
qualifying for the loan.

Stu

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Etienne <etiennevb[at]hotmail.com> wrote:

- quote -

If someone was married (not to one of the other people
already mentioned), their exemption amount doubles.

- quote -

I think 2004, since that's when the gift was _made_.

Seth

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Etienne wrote:

- quote -

Hmmm... This is where you really need to obtain appropriate
LEGAL advice. For example, if A and B were simply added to
the title as an accommodation to the lender, if could be
that they are not (under applicable state law) owners at
all. Perhaps they are simply "co-signers" or "guarantors" of
the debt.

(Parenthetically, however, it is hard to understand how
adding the names of people who were unable to pay rent would
BOOST the credit score. Was this (instead) an instance where
the parties were trying to claim that the home was "owner
occupied" for loan application purposes?)

MTW

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Christopher Green wrote:

- quote -

I agree with your postings in this thread. However, and not
that it makes any difference, but I wonder whether "rent
free tenancy" would really constitute a gift for gift tax
purposes? It seems pretty nebulous. <grin
Consider another hypothetical situation. Say that parents
allowed an emancipated child to return home. Would whatever
in-kind "support" that the parents provided be deemed a gift
for gift tax purposes???

MTW

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- quote -

Thank you all for your input, it makes sense to me now.

To me it seems like they should forget about artificially
trying to reduce the value of the gift with the free living,
and have the two donors just file the gift tax return.

Since it can be off-set against the lifetime exemption,
there will be no cash tax payment involved at this time
(please correct me if I'm wrong).

There is an appraisal report available from 2003, showing an
estimated value between $385,000 to $425,000.

Would this FMV (say $385,000) be affected by the fact that
the the gift is just partial ownership of the property? I
mean, it is a bit hard to sell a house on the market with
some other owner living in it, right?

Anyway, based on what I have learned so far from this
discussion, the donors should each file their gift tax
return for 2003. Take the FMV of the property, deduct the
mortgage balance, split that in four (there are four
previous owners, now there will be two left), then each
donor is gift-taxable for that quarter part minus the 2x
$12,000 exemption for 2003 (there are two donees). Am I
correct?

The quitclaim was executed in 2004, to be effective as of
2003. I guess a gift tax return for 2003 has to be filed,
not for 2004.... Let's hope there won't be penalties for
late filing...

Thank you all and have a great 2005!

Etienne

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When the transaction is not an arm's length one, there is
the problem of there being a gift element to the exchange.
To the extent that the transaction is for something more or
less than fair market value, the difference is a gift.

The problem I see with the OP's situation is that it is not
a transaction in which the value given by one party is the
forgiveness of an antecedent debt, because there is no debt.
In all the course of dealings between the parties to date,
the donors were never called upon to pay on the mortgage or
pay rent for the property, so there is no antecedent debt,
and the OP cannot construct a debt to be forgiven out of
thin air. The value given by the recipients is the value of
a nonexistent debt, which is zero.

Instead, the donors (A and B) had the use of the property at
no cost for six years, which I would contend is a completed
gift from the recipients (C and D), not an accumulated debt.
Because gifts don't offset, the donors cannot reduce the
value of their gift (the quitclaim) by the value of the gift
already received (the rent-free tenancy).

--
Chris Green

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"'If say a debt is forgiven in exchange for ownership of a
property, I would argue that this reduces the net gift
value, even if the forgiven debt would not be related to the
same property?!??!
""

If you forgive a debt in exchange for ownership of the
property, then you've bought the property for the amount of
the debt. Basic Crane/Tufts analysis. You'd take a basis
in the property equal to the debt you forgave, and the prior
owner (the debtor) would have an amount received equal to
the debt, and the excess of that over his/her basis would be
gain. Since I don't have my sources in front of me,
however, there may be a bifurcated treatment if the debtor
is insolvent after the transaction, in which case the
possibility exists that the COD income (i.e., the gain on
the property) may be excluded under s. 108. Please don't
attack me for being wrong, I don't know and I can't look it
up right now - I'm just raising the issue so you can verify
whether or not it affects the result.

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Because it looks like, from the course of dealings in the
past, that they didn't do that.

Correct me if this is not the case, but there was no
agreement that A and B would owe C and D for rent or
contributions. This means you can't just up and say "well,
now they do." If C and D came to A and B and said "you owe
us $18,000 back mortgage payments", they would tell C and D
to go whistle for it. If IRS looked at the transaction and
said "how did a $112,500 gift get whittled down to $94,500",
and C and D said "A and B owed us $18,000", IRS would say
"what evidence have you that A and B owed this debt?" Having
none, you lose the argument.

--
Chris Green

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Etienne wrote:
- quote -

Could be. But in that case whatever was received in excess
over the basis of what was given will be taxable income.

Stu

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"Christopher Green" <cj.green[at]worldnet.att.net> wrote:
- quote -


Mmm... That seems odd to me.

As far as I know (but I admit, that's not much about this
subject...), a gift is defined as something given not in
exchange for something of equal value.

If say a debt is forgiven in exchange for ownership of a
property, I would argue that this reduces the net gift
value, even if the forgiven debt would not be related to the
same property?!??!

Anybody any input?

-Etienne

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- quote -

Why would they only still owe rent for THIS year?
Why can't they just have accumulated a huge 'rent payable'
over the preceding years, that can be forgiven to offset the
gift value?

-Etienne

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- quote -

However, they still owe rent for _this_ year. The gift of
cancelling that debt might not take place until the end of
the year; in which case, the value of the foregone rent
could be used to offset part of the value of the quitclaim
gift.

Seth

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"MTW" <mtwingcpa[at]yahoo.com> wrote:

- quote -

B is brother of C and D.
A is aunt of C and D.

- quote -

A and B (quitclaimers) did not contribute any funds. they
were just added to the mortgage to "boost up the credit
score". When refinancing, their names were no longer
neccessary to get the loan, so for convenience and "to make
things simpler", they were removed by quitclaiming.

Yes, this was a bad decision, taken in total ignorance about
gift tax consequences.

- quote -

No, because of low income not being able to do so, and
because of close family relationship it was not asked for.

- quote -


Thank you for your input.

-Etienne

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"Christopher Green" <cj.green[at]worldnet.att.net> wrote:
- quote -

Thank you very much for your input.
I was just trying to collect some initial thoughts and
information, and will surely consult a tax advisor.

The value is considerable. Market value at time of gift was
about $400,000, mortgage balance about $175,000, so I would
say the value of the gift is $112.5k to both A and B.

Mmm... What is really the market value if two people remain
to live in it.... Who would buy it?

Thanks,

Etienne

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Etienne wrote:

- quote -

No. If anything, there is a history of gifts from C and D to
A and B, which would probably be in the amount of the market
rent for their share of the property. The property would
have had to be of considerable value for the gifts to exceed
the annual exemption: two-party gift equally to two parties
exempts $11,000 times 2 times 2 equals $44,000 a year.

- quote -

Doesn't work. Reciprocal gifts don't offset. The gift is
still the value of the share of the property they quitclaim.
The fact that they have received gifts relating to the same
property in the past doesn't affect the value of that gift.

- quote -

Yes, the $50k (not $32k) balance is somewhat reduced,
assuming the agreement is properly formalized. But it's
because A and B have conveyed something less than the full
ownership in the property. You could argue that the gift was
reduced by the present value of the market rent of so much
of the property as they occupy for however long they're
allowed to stay there.

Unless the amount involved is a lot more than $50k, this is
inconsequential anyway. The gift tax threshold for a
two-donor gift to two recipients is $44,000, leaving only
$6,000. This does not result in any current tax, but comes
out of the donors' lifetime exemption. It is a very small
part of that exemption, which is $1 million for taxable
gifts made by one person in his lifetime.

I'd say it's time to consult a competent tax advisor. You
don't understand gifts and gift tax well enough to proceed
without proper advice, which the above is not.

--
Chris Green

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Etienne wrote:

- quote -

Are any of these people related to each other? If so, how?

Did A and/or B contribute any funds to the original
purchase? Are they entitled to get this money back at some
point?

Did A and/or B pay any rent while living in the unit? If
not, why not?

Comment: Based on the limited information you've provided,
I'd guess this to be a complicated "intra-family" deal of
some kind. If so, you REALLY need to hire a qualified
attorney to determine and define the exact legal
relationships and responsibilities of the parties. I
wouldn't let the mortgage company try to dictated these
terms to you for THEIR convenience.

Also, I would not try to get away with some kind of "smoke
and mirrors" approach that you believe will be respected
"for tax purposes only," but which doesn't represent TRUE
intent and economic effect.

MTW

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