Any Tax Day Nightmares? Here Is One For You.

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Got a call from my CPA on Sunday evening with some really bad news. I was gifted a house from my father back in 2011. He purchased the house in 1984. It was a second home for both of us. After maintaining the home for five years and realizing that it was just a time and money sink, I sold it in 2015 and invested the proceeds in a number of ways. At the time, we did our withholding through the HUD so that we wouldn't have huge amounts due come tax time. I thought it was fine; I figured luck would have it that we owed more than we withheld, but that it wouldn't be much. I was so wrong.

So, the attorney who handled the withholding based it on an inheritance instead of a gift, so she calculated the basis off of the appraisal done in 2011 instead of the purchase price in 1984+improvements. Well, it is a beach house in a nice area that has seen tremendous growth in the past decade. So our claimed gain was WAY OFF and I had to cut a check for $30k over what I was planning to contribute yesterday. That included emergency liquidation of assets at a loss (maybe that will help next year).

My CPA did not catch it at the time of the withholding because she just assumed that the attorney understood the law. I, on the other hand, just trusted the people I hired to withhold the right amount. Stupid of me, I guess.

Yes, I understand that I am still coming out in the black on the whole thing, but when you get an unexpected notice that you owe $30k in 24 hours, it can be a little stressful.

I called my father to tell him that no good deed goes unpunished.

$30K is a lot to scrounge up in one day. The tax would have been incurred regardless but your tax advisor fumbled the calculation on the planning side.

Exactly. I was happy to pay my fair share, it just sucks when you make an honest attempt to plan and it all goes horribly wrong nonetheless. Needless to say, I am looking into a new accountant (even though my accountant is very good, but the mistake is a little disconcerting).

You sound like an intelligent person ... why on Earth would you trust OTHER people to make the right decisions for you? Doing this yourself is not rocket science and will pay off over the long haul.

It's unusual to receive a gift like this when the giftor is still living. 99% of these transactions are inheritance which is how the initial calculation was prepared. I'd imagine the accountant dreaded making that phone call to explain the gain to you.

DLR wrote:

You sound like an intelligent person ... why on Earth would you trust OTHER people to make the right decisions for you? Doing this yourself is not rocket science and will pay off over the long haul.

The other person got it right, the issue was one of timeliness. Better to hear it from your tax pro than via a notice from the IRS with penalties and interest attached.

Your father is still alive, yet you thought you could claim it as an inheritance?

Honestly, if you should have able to look numbers to determine the basis and I for the life of me can't understand why either you or the attorney thought using the 2011 basis was correct. Your dad didn't die. the Step-up basis is only calculated on the date of death.

DLR wrote:

You sound like an intelligent person ... why on Earth would you trust OTHER people to make the right decisions for you? Doing this yourself is not rocket science and will pay off over the long haul.

That is where you might be mistaken. I definitely need the help of people like beancounter (and yourself) to help me make sense of things when it comes to the IRS. I just wish it were all a lot easier. I know it would put certain good people out of jobs, but I think more people would be happy to pay their taxes if it were just up-front and simple like on most OTC purchases.

sdfsdfsdfsdfsdf wrote:

Your father is still alive, yet you thought you could claim it as an inheritance?

To answer both of your questions, it never came up. I never got that far into the details with the closing attorney. Their firm asked if we wanted taxes withheld prior to disbursement and we said yes. They prepared the HUD and I sent the HUD, 1099S and 709 over to my CPA and she said it all looked okay. I said great and went about my business thinking everyone was paid their due.

I am not a pro in this kind of thing. I know the taxes that I deal with on a monthly and quarterly basis, but that is the first house I have ever sold in my life. If someone would have said, "Hey man, if the home is gifted you need to claim this, if it is inherited you need to claim this" I would have understood, but the closing attorney just told me they would handle it.

Hindsight is 20/20 and all of that, right?

Wow, poor baby. Someone gifted you a beach house in a prime area with tremendous growth and you whine about it.

Jamin Thiel wrote:

Wow, poor baby. Someone gifted you a beach house in a prime area with tremendous growth and you whine about it.

No. Definitely feel extremely lucky. I have just never had a Tax Day fire drill until this year. It was stressful.

Every year is a friggen tax nightmare for me.

What about gift tax implications for your father?

Gruntz wrote:

What about gift tax implications for your father?

He dealt with his implications back in 2011 when it was gifted. I presume that was more straightforward.

I was hoping to hear more stories from others. I would love to learn a thing or two from the LRC tax wizards!

Where's Ryan Foreman?

For the sake of discussion I can add that gifting someone a house doesn't generate gift tax though it would be reportable on a gift tax return. If the giftor had sufficient assets to exceed the estate tax threshold then any tax would be assessed after the date of death and large gifts like this would be part of the calculation.

I don't have any tax day stories to tell since tax day is fairly unexciting at my shop - extensions for all! We did have a client this year who sold a website that was built as a hobby during the dot.com boom. Had to write a check in the mid six-figures to the IRS. Don't see something like that very often.

beancounter wrote:

We did have a client this year who sold a website that was built as a hobby during the dot.com boom. Had to write a check in the mid six-figures to the IRS. Don't see something like that very often.

Wejo?

In those instances, you ought to charge commission.

I have nothing to add to this conversation except that "gift" is not a verb.