Tax Answers

March 30, 1994

Here is an answer from members of the Maryland Association of Certified Public Accountants to a reader's tax question. The Sun will publish answers through April 15.

Q: My mother owns a piece of unimproved property worth about $40,000. She would like to give it to me and hold a mortgage of $40,000, and then give me the $10,000 a year for four years. Can we do that?

A: There are two different ways of looking at this based on two court cases. The results of one court case allow this method of spreading gifts if the note (in this case, the mortgage) is in fact, valid and enforceable. Your mother would have to report an installment sale of the property and report a portion of the gain each year as the mortgage comes due.

In a more recent case, however, the Internal Revenue Service viewed this type of transaction as an intended gift of the entire amount because there is no intent to collect the mortgage. Therefore, the child will inherit the parent's basis in the property, and the mother would not have a sale but would be required to file a gift tax return for the gift of $40,000.

This method of gift-giving that you and your mother are interested in is widely used, but you should be aware that the more recent court case exists and leave room for the IRS to challenge you.

The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary. Consult with a tax adviser for specific advice.

Readers may submit questions by phone, mail or fax. Selected questions will be answered in The Sun and The Evening Sun.

To ask a tax question by phone, call Sundial, The Sun's telephone information service, at (410) 783-1800. In Anne Arundel County call 268-7736, in Harford County 836-5028, and in Carroll County 848-0338. Using a touch-tone phone, enter 6120 after the greeting.

Written queries may be sent to TAX QUESTIONS, The Baltimore Sun, Business News Department, 501 N. Calvert St., Baltimore 21278. Fax questions to the Business News Department at (410) 783-2517. Callers are encouraged but not required, to leave their names and phone numbers should questions need to be clarified. Names will not be published. Questions will not be answered by phone.

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