Need advice on gifting property...

[EmmaL2000]

I live with my mom and she and I will be moving soon and buying a new house. My mom was going to gift me the house and live there with me so I wouldn’t have to worry about not having anywhere to live when she eventually passes away. (Hopefully not for some time. She’s only 75). She was thinking of leaving it to me in the will, but I’m afraid one of my two sisters will fight it and I will again be out on the street. I’ve read though that there are gift taxes up to 40% on anything over 14,000. I’ve also read that you can gift a house without paying gift tax as long as the house isn’t more than 5.4 million (and it will be nowhere near that amount). I’m not sure which one is true on property. If she will have to pay a large gift tax I will pay it, but I’m wondering if there’s another way around that. I’m also wondering if she gifts me the house if my sister will be able to fight that when my mom eventually passes away. My other alternative is perhaps getting a mortgage once I’m working again (I've been out a few years due to illness and pain) and just buying it from her. Any help would be appreciated. We are in Illinois.

 

[Ohiogal]

Why would she not leave it to you JTRS with you both as owners.

 

[Zigner]

There may be future tax implications if the ownership of the house is transferred now, as opposed to being transferred as part of the estate after mom's death. A properly formulated estate plan, whether it be a will alone or a trust with a pour over will, will avoid those tax implications and also protect the estate from challengers.

 

[adjusterjack]

In addition to tax issues, owning the property jointly could also be problematic. If either of you run into financial problems you could both lose the house.

Fortunately, a few years ago, Illinois joined the ranks of many states that allow transfer on death deeds.

Read about it at:

https://www.isba.org/ibj/2011/12/thetransferondeathinstrumentcomesto
With a transfer on death deed, she owns it, you're the recorded beneficiary, the property ownership transfers to you at the moment of her death.

 

[Taxing Matters]

I’ve read though that there are gift taxes up to 40% on anything over 14,000. I’ve also read that you can gift a house without paying gift tax as long as the house isn’t more than 5.4 million (and it will be nowhere near that amount). I’m not sure which one is true on property.

The way federal gift tax works is that your mother may give a total of $15,000 in gifts to you this year without any gift tax consequences. It used to be $14,000 but it goes up every few years due to inflation. This includes ALL gifts she gives you during the year; birthday and holiday gifts, etc are all added together. If the total gifts exceed $15,000 then amount over the $15,000 is known as a taxable gift. So let's say she gives you a total of $45,000 in gifts this year. That would mean she makes a $30,000 taxable gift to you. The taxable gift first reduces her lifetime credit against gift and estate taxes. Only once that credit is fully used up does she pay gift tax (or her estate pays estate tax). So the more of that credit she can avoid using during her lifetime the more credit her estate will have to use to cover estate tax. Right now that credit stands at $11.4 million dollars, meaning that she would have to give away taxable gifts of $11.4 million before she'd use up all of the credit and have to pay estate tax. The credit will go back down to something over $5 million, however, in 2026 because the increase to the credit in the 2017 tax act is temporary. So she could make the gift now and not pay any gift tax. She'd just have to file a gift tax return because a taxable gift was made.

The problem is that Bernie Sanders and some other Democrats are proposing to drastically reduce the credit and make other changes to the estate and gift taxes that would make them apply to a lot more people. So even though right now she might say she'd never have $11.4 million to give away and thus think making taxable gifts isn't something to worry about, using up that credit needlessly might come back to haunt her later if the Democrats take power in 2020 and they do make the kinds of changes Bernie and others want to make. Those changes might impact her estate down the road.

Of course, if she waits and passes the home to you at her death, the home will be a gift that must be taken into account for estate tax purposes, and the home might be worth even more then, resulting in a higher estate tax hit. If the estate tax credit is still large enough to cover her entire estate then it is no problem.

There is another tax piece to this. And that is income tax. If she gives you the home now then you get the home with the same adjusted basis in it that your mom has. When you sell it, the gain would be the difference between the net sales price and your basis in the home. If you get the home passed to you after her death by will, joint ownership, beneficiary deed, by a life estate she creates, or by a revocable living trust then the basis in the home gets reset to fair market value (FMV) on the day she died. If her basis in the home now is low, getting that reset to FMV at her death can wipe out a lot of gain and potentially save you a lot of income tax when you sell it.

Right now it's unknown what the future of the estate and gift tax will be. But given the law right now, it would be better overall taxwise for your mom to pass you the home at death. She'd incur no estate and gift tax under present law and you'd likely save income tax when you sell it. That said, there are other non tax considerations to think about and it may be those other considerations make it more prudent to give you the home now. Tax outcome should never be the sole consideration in these kinds of decisions.

 

[EmmaL2000]

In addition to tax issues, owning the property jointly could also be problematic. If either of you run into financial problems you could both lose the house.

Fortunately, a few years ago, Illinois joined the ranks of many states that allow transfer on death deeds.

Read about it at:

https://www.isba.org/ibj/2011/12/thetransferondeathinstrumentcomesto
With a transfer on death deed, she owns it, you're the recorded beneficiary, the property ownership transfers to you at the moment of her death.

In addition to tax issues, owning the property jointly could also be problematic. If either of you run into financial problems you could both lose the house.

Fortunately, a few years ago, Illinois joined the ranks of many states that allow transfer on death deeds.

Read about it at:

https://www.isba.org/ibj/2011/12/thetransferondeathinstrumentcomesto
With a transfer on death deed, she owns it, you're the recorded beneficiary, the property ownership transfers to you at the moment of her death.

In addition to tax issues, owning the property jointly could also be problematic. If either of you run into financial problems you could both lose the house.

Fortunately, a few years ago, Illinois joined the ranks of many states that allow transfer on death deeds.

Read about it at:

https://www.isba.org/ibj/2011/12/thetransferondeathinstrumentcomesto
With a transfer on death deed, she owns it, you're the recorded beneficiary, the property ownership transfers to you at the moment of her death.

I'm a little confused though. Why would it be problematic for both parties if one had financial trouble as long as the other party paid the mortgage in full. Plus, we live in another house at the moment. My mom plans to sell and pay the new house off outright. There will be no mortgage on the new house. I've read before though that if you have joint tenancy with someone else and that person isn't your spouse, when the other party dies their heirs get half the house. If this is true that means I will have to own half the house with my sisters and I'll be right back in a bad position with me having to sell, split it, and move out. Or is this not true? And can my mom put me down as joint tenant without my sisters contesting it?

 

[EmmaL2000]

Why would she not leave it to you JTRS with you both as owners.

She plans to sell the house we live in now (which is her house..not mine) and buy a new one with the money she gets from selling the current house. If she puts me down as a co-owner, isn't that considered a gift? Wouldn't she be charged a gift tax for the half of the house that I own? I know nothing about law which is why I'm asking.

 

[PayrollHRGuy]

@EmmaL2000 Please read Taxing Matter's post above.

 

[LdiJ]

She plans to sell the house we live in now (which is her house..not mine) and buy a new one with the money she gets from selling the current house. If she puts me down as a co-owner, isn't that considered a gift? Wouldn't she be charged a gift tax for the half of the house that I own? I know nothing about law which is why I'm asking.

As you were already told you need to re-read Taxing Matter's post. However, in case you did not understand it, I will try to put it in very simple terms. No, your mother will NOT have to pay gift tax. She will have to file a gift tax return, showing the gift, but she won't have to pay any tax.