Gift Tax on Property

I'm in CA. I want to buy the house my Dad owns, then use that house (in my name) as collateral for a loan on a larger home. Can I do this legally and avoid gift tax by "purchasing" Dad's home for far less than its value? What other legal issues might I face?

Your plan would not work because a taxable gift takes place to the extent that the value of the property transferred exceeds the consideration received for the transfer. (IRC section 2512(b)). However, you may not have a gift tax problem unless your father has total property valued at over $685,000. The reason for that is that there is a lifetime exclusion, currently of $675,000 of property under the estate and gift tax law. There is also an annual $10,000 gift tax exclusion.

What that means is that the first $10,000 of value of the house gets excluded under the annual exclusion, and the rest of the value of the house gets excluded under the $675,000 lifetime exclusion. The downside is that you would use up part of the total exclusion, so if his estate is over what is left of the exclusion, the estate would be taxed on that.