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A little expansion on Bill's discussion of basis:

Your son's basis is the lower of:
*your wife's basis
*the value at the time of the gift.

Since we're talking about a rental it's important to mention that your wife's basis is her adjusted basis net of depreciation. Depending on how long she owned and rented it (the transfer to the LLC is irrelevant) her adjusted basis could be just the undepreciated value of the land.

Gifted property carries two bases if the FMV at the time of transfer is less than the adjusted basis (not likely in your case). If the property is sold for more than the adjusted basis, gain is computed normally. If it's sold for less than the FMV at the time of transfer that value is the starting point for figuring the loss. Anything in between results in a zero gain/loss.

See Pubs 550 and 551.

Rule Your Retirement Home Fool
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