Gift of equity in a house

[Eclipse]

We are in PA.

My partner owns a house with no mortgage. Since I am financially adding to the house (doing the landscaping, renovating, doing improvements which i finance from my own money) he wants to add me to the title so I own the house with him. What tax consequences should we both expect, me as a "giftee" and him as a person gifting it?

 

[Foamback]

That’s not what a gift of equity is

https://www.investopedia.com/terms/g/gift_of_equity.asp

 

[Foamback]

It could be considered a gift of 50% of the property, and a form 709 reporting the gift if the value is above $16K is required.

But….no tax is actually due until the $13M lifetime gift and estate limit is reached federally. This limit will sunset down to $5M in 2025.

The state may have its own set of rules

 

[zddoodah]

My partner owns a house with no mortgage.

In this context, I assume "partner" means boyfriend.

What tax consequences should we both expect, me as a "giftee" and him as a person gifting it?

You both should check with your personal tax advisor(s) since consequences may depend on your unique situations about which we know nothing.* That said, neither of you will have any direct consequences in terms of income tax. He may be required to file a gift tax form with the IRS (and maybe also the PA taxing authority). However, as noted above, no gift tax would be due unless this is a crazy expensive home.

* - I'd also strongly urge him to consult with a local attorney because putting a person to whom you're not married on the title of one's home is often a TERRIBLE idea, but that's not your concern.

 

[Foamback]

Capital gains for both of you when the house is eventually sold is another discussion.

Depending on lots of things, if you remain off title and inherit the house, you do so with no capital gains at the date of death. If you are on title and the house is sold, the capital gains basis is the date your partner bought the house.

Then to further complicate things, Pennsylvania has a non spousal inheritance (versus the more common estate) tax

 

[davew9128]

Merely adding someone to the title is not a taxable event. Once they start having actual equity is when a taxable gift might occur and determining when that happens might depend on how you title the ownership as well as local law.

 

[davew9128]

Capital gains for both of you when the house is eventually sold is another discussion.

Depending on lots of things, if you remain off title and inherit the house, you do so with no capital gains at the date of death. If you are on title and the house is sold, the capital gains basis is the date your partner bought the house.

While this is true, it ignores the additional $250k principal residence exclusion that would apply for the partner owning the residence instead of just living there.

 

[Taxing Matters]

We are in PA.

My partner owns a house with no mortgage. Since I am financially adding to the house (doing the landscaping, renovating, doing improvements which i finance from my own money) he wants to add me to the title so I own the house with him. What tax consequences should we both expect, me as a "giftee" and him as a person gifting it?

The tax consequences of this depend on exactly what the terms of the deal are. For you, by far the best arrangement is to get half (or whatever share he is considering giving you) as a gift and then your contributions to the home for improvements after you receive your share are just treated as additions to your basis. Let's say he gives you half interest in the home as a straight out gift. You'd own half the house and with that you'd get half the tax basis he has in the house, too. Then amount you spend on improvement you do just add to your basis in the property. Your labor does not add to basis, nor does any amount you pay for routing repairs and maintenance. The basis is what is used to determine your gain when the property is sold. He'd have to file a federal Form 709 with the IRS to report the gift he made to you.

Though he has to file a gift tax return, he won't have any gift tax to pay until the total of his taxable gifts made over his lifetime exceed the amount that is covered by the unified credit against gift and estate taxes. The unified credit is currently 13,610,000. Until he reaches that point he's just reducing that unified credit. Thus until that is used up the gifts he makes will only reduce his unified credit. Any part of the unified credit that it not used up by gifts during his lifetime will be available to his estate to apply to the federal estate tax.

In short, doing it this way would not result in either of you having any tax to pay right now. He'd just end up filing a gift tax return and reduce his unified credit.

If he transfers to you some share of the home in exchange for the work you do on the home it gets more complicated, and a message board forum is not the best place to walk through exactly how that would work. You'd want to see a local tax professional for that (enrolled agent, tax CPA, or tax attorney). The key takeaway I wan't you to have on this kind of deal is that you'd have income in the amount of the share he gives that is compensation for the work you do. That would result in raising your taxable income for the year and trigger a requirement to pay self-employment tax, too. Self employment (SE) tax is how self employed persons pay FICA (social security, Medicare, and Medicaid) taxes.

I recommend you two see a tax pro to sort out exactly what the consequences will be for whatever deal you two decide upon.

If he were my client, I wouldn't recommend giving you a gift of any part of the home unless he was sure he wanted you to have that regardless of how the relationship turns out.

 

[Foamback]

The principal residence exemption is a separate issue fro

While this is true, it ignores the additional $250k principal residence exclusion that would apply for the partner owning the residence instead of just living there.

The principal residence exemption is a totally different issue than the date and amount of basis

 

[davew9128]

The principal residence exemption is a separate issue fro

The principal residence exemption is a totally different issue than the date and amount of basis

Yet entirely relevant.