Gifting Appreciated RE Prior To Sale

I am selling a 1031 commercial prop next month, and want to segregate some of the proceeds to my post-college kids.

We had built homes as a "homeschool project' when they were in HS, and 1031'd them into this commercial place ~ 6 yrs ago.

I understand they can assume my cost basis and we can divide up the proceeds if we declare this intent prior to sale, AND I don't control their portion of the proceeds after the sale.

With current LTCG rate and low earnings for them we can divest and keep tax obligations low.

Does anyone know the particulars, or has done this. My JK Lasser's tax book is a bit vague.

How do you plan to keep tax obligations low? The maximum long term capital gains rate of 15% would apply to your kids as well as to you. Whether you gift the after tax proceeds to your kids, or gift them an interest in the property prior to the sale, wouldn't the net after tax result be the same in either case?

Just playing devil's advocate.

We can hopefully take advantage to the lower than 15% brackets, as all of us are currently (intentionally) unemployed to do other things (travel, new business ventures, more school) AND to get into the lower gain brackets. The props being sold in 2008 should keep at least some of us in the lower brackets. 0% & 10%

If you are living the leisure lifestyle, I assume you must have some income to cover your living expenses.

When you sell your property, your profit is included in your taxable income. If the profit is large enough, your marginal tax bracket will rise.

I sense that you believe that all of your sale profit in 2008 will be tax exempt just because your ordinary income tax bracket is less than 25%. This is not really the way it works.

First, you need to recognize that your sale profit is first applied to unrecaptured depreciation at a 25% tax rate regardless of your marginal tax bracket. Once the unrecaptured depreciation is carved out of your profit, what is left is capital gain from appreciation.

Now, let's say your other taxable income is low enough to put you in the 15% tax bracket. Let's say that if you earn just $5K more next year, you would cross the threshhold to the 25% tax bracket. Capital gain from appreciation is taxed at the rate that applies to the tax bracket in which it is earned. In my example, the first $5K of your 2008 capital gain from appreciation is earned in the 15% bracket, so the capital gains tax rate will be 0% on that $5K. The rest of the capital gain will be earned in the 25% bracket so the 15% capital gains tax rate will apply.

Your plan will succeed if you have significant gain from appreciation and if you and your children can each absorb more of that capital gain in the lower tax brackets than you could by yourself. Otherwise, there would not be any tax savings.

I would consult a sharp atty or CPA for alternate approaches.

It doesn't sound like to need the money, so why not 1031 some of it into another building?

Installment sale?

And there is a new approach that uses an annuity to shelter some of the income.

thx, I realized the gain would rachet my rates, as I have been strategically grabbing my LTC gains for the last few yrs.

I'm not 1031'ing my LTCG's, but am doing 1031's on Short Term Gains, as I feel the current 15% is gonna be very hard to beat in the future. I would prefer to pay the current gains @ 15% and NOT 1031, but instead, adjust my cost basis on replacement properties higher. I have bought very few replacement props as I'm relocating to a less taxing state; after completing my current 'retraining' degree program. - thus I have negligible income, (I am robbing my tax advantaged ETF's to pay stuff like $30/day in personal property taxes & $3.00 / day in food expenses. (fuel is free... 50 mpg 1976 'greasecar')) School is via NAFTA funds and remainder in school loans which don't require payment till 2010.

I note the projected threshold for 25% tax bracket in 2008 is $65,100. I only have ~$15k in depreciation, so can adjust the kids gains to keep them in 15% range and I will go higher if necessary since I have all the deductions, and gift excesses to our family foundation

According to scenarios run today, It seems I will only save 2.85% by shifting gains to kids, so that is not necessary, tho... I do need to figure out how to get them each ~ $100k equity in accumulated gains from their previous homeschool building projects and subsequent gains on Commercial Prop investments. (I don't want to have to gift them $12k each for ~10yrs)

Can I just 'loan' them the $100k as a down payment, and later 'forgive' the debt? (I assume that would be 'taxable' to them)

If tax savings is less than 3%, why not just pay the taxes and divide the after tax proceeds. Seems a lot simpler if minimizing the income tax impact is your only concern.