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My parents sold their farm last year and gave it to my three sisters and me via an investment account. We each got $110K in separate accounts. In turn, we each pay them $7K per year to live on.

1. Do we pay dividends and capital gains on this account as a non-retirement account (about $9.5K this for 06)?

Yes. You should receive 1099's for these accounts.

2. Is the $7K payment deductible for me?

3. Is the $7K payment taxable for my parents?

No and no.

Depending on what income your parents have and how it's spent, they may qualify as dependents under a multiple support agreement if you and your siblings combined are providing more than half their support. See IRS Publication 501.

I am getting conflicting comments from my parents tax person. He says to treat it as a retirement account and pay taxes only on money as it is removed from the account.

I'm sure he's just a lovely man, but het's pulling that out of his hat. You might gently inquire of your parents whether the tax person has dealt with their gift tax filing requirement for 2006, assuming that's when the money was transfered to you and your siblings.

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