Gifting/ Deeding a house

[EandTBwells]

What is the name of your state?What is the name of your state?

Washington, DC


Help...I moved from my primary residence in DC over 5 years ago into a new residence in another state. My son and his wife now live in the DC home for over 4 years. I want to deed them the house as a gift. The house is completely paid for and was purchased over 40 years ago for $26,000. The home is now appraised at $350,000 and above. Can anyone please advise on how to do this and what are the pros and cons? My husband and I are seniors. Thanks.

 

[Snipes5]

Yes. Read the other thread where I just explained to that poster how gifting screws both the donor and the donee when it comes to capital gains.

It is too bad that you haven't lived in the house for two of the past 5 years, however, if you gift them the house, their basis in it will be $26,000, which is bad for them.

Better to sell them the house at a legitimate price, on an installment plan.

Snipes

 

[EandTBwells]

Read other threads, but not sure if I understand your answer. If it is a matter of selling, my son and daughter-in-law, are not planning on selling the house, but living there for at least another 7years. They have one toddler and other on the way with only my son working. Selling is nowhere on their minds. So does that change the picture? Also, my husband and I are in good health and prayerfully won't be dying any time soon. So inheritance is not an option, at this time.

 

[Snipes5]

There are three ways to dispose of a house, theoretically. Sell it, gift it, or die and leave it for your heirs.

If you SELL it to them, their basis in it will be whatever THEY paid you for it. If you GIFT it to them, their basis will be whatever YOUR basis is, which you indicated was $26,000.

It doesn't matter WHEN they plan to sell it.

It appears to be located in a place that has a hot housing market right now.

If it is currently worth $350,000, capital gains would be $324,000 on it if it were sold tomorrow.

If they keep it for 7 years, chances are excellent that one of several things will happen. 1) Congress will change the tax laws in greater favor of the government (almost certainly!), and 2) The house will appreciate to the point that the gain on it is >$500,000.

If you GIFT it to them, their basis is $26,000. If you SELL it to them, their basis will be $350,000 (or whatever you sell it to them for, as long as it is a reasonable amount).

If you sell it to them by installments, or carry back a mortgage on it, the your gain will be spread out over time so you don't take such a large tax hit.

If you have enough money that you are considering just giving away a house of that value, use some $$$ and talk to an estate planner and an Enrolled Agent before potentially doing something you may live to regret.

Snipes

 

[NewGuyonBoard98]

Snipes5,

Suppose the OP decides to gift the house to her son and son's wife. What about if her son and son's wife then live in the house as their main home for more than two years then they sell it. Can they take the sale of home capital gain exclusion?

If they can then how much is their basis of the house won't even matter. Is it right?

 

[anteater]

Snipes5,

Suppose the OP decides to gift the house to her son and son's wife. What about if her son and son's wife then live in the house as their main home for more than two years then they sell it. Can they take the sale of home capital gain exclusion?

If they can then how much is their basis of the house won't even matter. Is it right?

It depends on what the net sales price would be. The max exclusion, if married filing jointly, is $500,000. The OP was estimating what it would sell for now; it could be higher. And who knows what housing price appreciation might push it to, even in 2 years.

 

[scrappydoo]

Similar Situation

CA

There is a similar situation going on in my family...

My sister and her husband live with my grandmother. They have been living with my grandmother for about 5 years.

My grandmother owns the house free and clear (no mortgage). She bought the house about 25 years ago for $125K. My grandmother wants to give the house to my sister and her husband now rather than giving it to them in her will. The house is worth about $450K today.

If my grandmother gives my sister and her husband the house, what are the tax implications? I think my sister and brother in law will owe taxes but I'm not sure. I know there is an $11K gift exclusion but since they would essentially be receiving a gift of $450K won't they owe taxes on $439 ($450 - $11K)?

 

[Snipes5]

Gifts are not taxable to the recipient.

Your grandmother will have to file a gift return, but it is unlikely that gift tax will have to be paid. It will be deducted from her unified credit.

The recipients' basis will be whatever your grandmother's basis is, plus any gift tax paid, if indeed any gift tax is paid.

Tell grandma to talk to an estate planner before making this very financially foolish move.

Snipes

 

[scrappydoo]

snipes5

thanks for the information - I appreciate it.

So...I have another question along a similar line...

I know there is an "$11K gift exclusion" law. When does and how does that come into effect? This only applies to the giver?

In other words, if I gifted someone $20K ($11K of it falls under the gift exclusion - but what about the remaining $9K) Who pays tax on the $9K if any?

In my grandmother's case - not only is it foolish for her to gift the house before she dies, it is also a foolish financial move for my sister since she will get the house at a very low basis. It is better to inherit the house. Correct?

Why do you think it is unlikely that my grandmother would have to pay gift tax and what is her unified credit.

Thanks!

 

[Snipes5]

You are allowed an estate of 1.2M free of tax. The Unified Credit is approximately $345,000, which is the equivalent of the tax on 1.2M.

If you "gift" your estate before you die, in amounts larger than $11K to any one recipient, you must file a gift return, to account for the amount gifted, and the amount of your unified credit that you have used.

Most people do not have an estate of 1.2M, so tax never becomes an issue.

If you gift $20K to someone, you must file a gift return, but again, no tax will be due.

If you gift $11K or less, it's exempt, and you need not file a gift return nor account for it in any way.

Recipients NEVER pay gift tax. Gifts are not taxable to the recipient. EVER. How I wish I could paste that at the top of this forum. Someone asks this question at least once every two days or so, and apparently no one knows how to use the search feature to see if their particular question has already been asked.

Yes, it would be far better to inherit than to be gifted something, from a financial perspective.

Snipes