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Law Offices of Ronald W. Rutz
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September 25, 1998: Real Estate as Tax Shelter; Unfair Imposition of Gift Tax

Q: I misplaced your March 28th article concerning real estate as a possible tax shelter for college students. Would you run it again?

A: I have had a number of similar requests from returning CSU students for this column. (It is nice to know that I am not the only one who misplaces material during a move.) The information may now be even more timely, federal money is about to become available for low income and first time buyers here in Colorado. With the average college stay stretching to five or more years, maybe this could be an attractive choice for some.

Q: I will be graduating from Colorado State University in a few months and want to sell my condo. But I want to use my profits to pay off student loans and travel, not to pay taxes or to roll the money over into a new home. Do you have any suggestions?

A: The 1997 Tax Act allows anyone, regardless of age, to shelter from taxation all of his or her gain from the sale of real estate up to $250,000 ($500,000 for a married couple), provided the person owned and lived in the home for two of the last five years.

Thereafter, you can shelter up to another $250,000 any number of times, provided that 24 months have passed from the previous sale and exemption claim, and provided further that you have lived in the new home for two of the past five years.

Q: How dare the IRS threaten to impose a gift tax if a fan decides to give a home run baseball back to either Slammin' Sammy Sosa or Big (mighty) Mac McGwire!

A: Well, even though I have to bite my tongue (or hope lightning does not strike me down for what I am about to write), the IRS is just doing its job based upon the laws that Congress has told it to enforce. In fact the IRS could be criticized for unequal enforcement of the tax laws if it does not vigorously pursue these kinds of transfers. Should the tax laws be enforced based upon polls or how powerful our political "friends" are?

As long as a fan gains any rights to the ball in his or her possession, a transfer for less than adequate consideration is a taxable event. If the "value" of the fan's interest in the baseball is less than $10,000, then there is no problem. The gift would be exempt and no tax returns would need to be filed. If the value is greater than $10,000, then taxes must be paid by the giver on the value in excess of $10,000 (even if the giver did not receive anything), without further help under other provisions of the tax code.

Although it is true that up to $625,000 can be given tax free by claiming credit under the fan's unified credit, that may be no solution because now that fan has lost that amount of the exemption to shelter future gift and estate transfers. There may be other tax provisions and arguments that can be tapped, but any such magnanimous fan needs to talk to a good tax attorney before marching down and having his or her picture taken giving the ball back.

Believe me, you do not even want to hear about possible imputed income tax problems for the fan and the theoretical tax consequences to the ball club, not to mention to the slugger under certain hypothetical fact patterns. But I digress.

Thus the bottom line is any transfer to a non-spouse, for less than adequate consideration, could have tax implications if in any calendar year the total amount of transfers to any one transferee exceeds $10,000. If that is not acceptable, Congress should have the courage to change the law for a more equitable and common sense result.

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