Your 2007 Taxes: Your toughest tax questions

February 1, 2008

When family ties boost your tax bill; How to figure gift tax on stock shares; Cutting the tax when you sell property; What's taxable when you're executor; When a narrower scope makes tax sense; A way to invest in your child's home

When family ties boost your tax bill

My father and I are in practice together, but soon I'll relocate and start a solo practice. I'd like to buy some of the equipment I'll need from Dad, but a friend ran into a tax hitch when he did the same thing with his brother a few years ago. He doesn't remember the details. What's the potential problem?

When you buy business equipment from a related party, you can't deduct the cost up front as a Section 179 small business expense. Instead you must depreciate it over time-five years for simple office equipment such as copiers and computers; seven years for office furniture, cell phones, and fax machines; and even longer for more-durable types of equipment. For details on depreciating equipment, see IRS Publication 946, How to Depreciate Property, available at http://www.irs.gov/pub/irs-pdf/p946.pdf.

I bought some shares of stock for $1,000 in 1990, and now they're worth about $30,000. If I give them to my son, will this be considered a gift of $29,000 or $1,000? And on which amount will he owe capital gains tax?

Your gift amount is the shares' full fair market value on the date you hand them to your son; for gift-tax purposes, your $1,000 original cost basis doesn't count. So if you give him the shares now, you're making a $30,000 gift. Because of the annual gift tax exclusion for 2008, $12,000 will escape gift tax ($24,000 if you're married, you and your spouse own the shares together, and you gift them jointly), but the remaining $18,000 (or $6,000) will be a taxable gift. You won't owe tax now (unless this gift puts you over the $1 million lifetime limit for tax-free gifts), but the amount of assets that will escape estate taxes after you die will be reduced accordingly. File Form 709 to report the gift.

When your son sells the shares, he'll calculate his taxable capital gain by subtracting your $1,000 basis from his profit. So if he sells them immediately for $30,000 and has no other capital gains or losses for 2007, he'll owe tax on $29,000. Your holding period for the stock also transfers to him, so he'll have a long-term capital gain taxable at 15 percent if he's in the 25, 28, 33, or 35 percent bracket. Better still, if he's in the 10 or 15 percent bracket he'll pay no tax at all, thanks to a tax rate reduction that applies to capital gains received in 2008 through 2010.

Cutting the tax when you sell property

Years ago I inherited land that I'll never use. Now I'm trying to figure the most sensible way to get rid of it. If I sell it, I'll have a hefty capital gain. How can I ease the tax pain?

You could seek a developer or private buyer who'll pay you in a series of installments over several years, rather than a lump sum. Although this strategy wouldn't eliminate the tax, it would soften the blow by spreading it over the same number of years. And if you're willing to provide a mortgage to the buyer, you'd earn some interest income as well. Keep in mind, though, that if the capital gain rate rises before you collect the full sum, you'll pay more tax overall.