Questions about house "owned" with sister

[SisterHelpPlz]

I live in NJ. The residence is in NY.

We were gifted this property from our mother before her death in '97. It was completely paid off at this time and had a cost basis of $27,000. My sister has lived in this property since our mother passed and has paid all property taxes as well as upkeep. We still are listed as owning this property 50/50 even though I have had no involvement.

I now wish to be rid of this property. I want to gift my half of the house to my sister outright without her making any payments to me (would be about $235k). I would like to make this gift without paying any taxes AND without tapping my lifetime exclusion amount.

I was thinking that for the past 16 years I could say that I donated the maximum annual exclusion amount to my sister in the form of her part of the house. Since the IRS wouldn't need any paperwork under the annual exclusion rate I think this might work. We could even both sign letters dated every year saying that I gifted her this amount of the house.

Is this a possible solution? More importantly, is this a legal solution?

 

[LdiJ]

I live in NJ. The residence is in NY.

We were gifted this property from our mother before her death in '97. It was completely paid off at this time and had a cost basis of $27,000. My sister has lived in this property since our mother passed and has paid all property taxes as well as upkeep. We still are listed as owning this property 50/50 even though I have had no involvement.

I now wish to be rid of this property. I want to gift my half of the house to my sister outright without her making any payments to me (would be about $235k). I would like to make this gift without paying any taxes AND without tapping my lifetime exclusion amount.

I was thinking that for the past 16 years I could say that I donated the maximum annual exclusion amount to my sister in the form of her part of the house. Since the IRS wouldn't need any paperwork under the annual exclusion rate I think this might work. We could even both sign letters dated every year saying that I gifted her this amount of the house.

Is this a possible solution? More importantly, is this a legal solution?

A better solution would be to formally, with a closing and everything sell it to her now for 1/2 of the fair market value of the home, with proper interest (you holding the mortgage), and then gift her a chunk of the principal each year based on whatever the limits are at the time. Yes, you will end up with some interest income to pay taxes on, but that's better than jury rigging something fraudulent.

 

[SisterHelpPlz]

A better solution would be to formally, with a closing and everything sell it to her now for 1/2 of the fair market value of the home, with proper interest (you holding the mortgage), and then gift her a chunk of the principal each year based on whatever the limits are at the time. Yes, you will end up with some interest income to pay taxes on, but that's better than jury rigging something fraudulent.

Thank you for the quick response. Your suggestion was actually my backup plan, if my original did not work. The reason I made the original post was because it seems that the IRS would have no real way of knowing that I was gifting my sister part of the house each year since it was below the annual gifting limitation each year and I would not be required to report it every year.

Would they have a case against me if they did try to dig deeper? To me it seems like everything we did would be legal.

EDIT: Let me also make it clear that I'm not trying to "cheat" the system. I am just trying to find a legal workaround if it is possible.

 

[LdiJ]

Thank you for the quick response. Your suggestion was actually my backup plan, if my original did not work. The reason I made the original post was because it seems that the IRS would have no real way of knowing that I was gifting my sister part of the house each year since it was below the annual gifting limitation each year and I would not be required to report it every year.

Would they have a case against me if they did try to dig deeper? To me it seems like everything we did would be legal.

EDIT: Let me also make it clear that I'm not trying to "cheat" the system. I am just trying to find a legal workaround if it is possible.

It would be a "cheat" because you didn't gift her the house over the last 16 years. It would be a single gift, that you are giving now, and therefore should be reported as such and should go against your lifetime exclusion for gifting. If your eventual estate/long term gifting is not large enough for gift taxes to kick in, then its a cheat that harms no one. However, I doubt that you would be worrying about your lifetime exclusion for gifting unless its likely you will eventually exceed that if this gift is included, therefore you would be committing tax fraud.

 

[SisterHelpPlz]

It would be a "cheat" because you didn't gift her the house over the last 16 years. It would be a single gift, that you are giving now, and therefore should be reported as such and should go against your lifetime exclusion for gifting. If your eventual estate/long term gifting is not large enough for gift taxes to kick in, then its a cheat that harms no one. However, I doubt that you would be worrying about your lifetime exclusion for gifting unless its likely you will eventually exceed that if this gift is included, therefore you would be committing tax fraud.

I fail to see how the IRS would be able to prove that.

 

[Zigner]

I fail to see how the IRS would be able to prove that.

Nobody said they would. However, this board does not advocate illegal activity just because one may not get caught.

 

[tranquility]

I fail to see how the IRS would be able to prove that.

The IRS does not have the burden of proof.

Did you know paper formulas change through the years? As does how ink dries as does how handwriting gets. There are also issues about who paid insurance and other things that could bring up gift issues.

It is clearly fraud. Stop being silly. It is also perjury when you claim it on a signed return. Sheesh.

 

[xylene]

Use your lifetime exclusion.

Give us a reason why you should not.

 

[SisterHelpPlz]

Use your lifetime exclusion.

Give us a reason why you should not.

I will most likely use up all of my lifetime exclusion. Figured I'd check my options for free before consulting my attorney. Obviously I do not want to commit fraud, so I will see what my attorney says.

Thanks.

 

[LdiJ]

I will most likely use up all of my lifetime exclusion. Figured I'd check my options for free before consulting my attorney. Obviously I do not want to commit fraud, so I will see what my attorney says.

Thanks.

Your attorney is not necessarily the best person to ask unless your attorney is a tax attorney. Otherwise, you would want to be consulting a tax professional. The average attorney (other than a tax attorney) know very very little about tax.

 

[SisterHelpPlz]

Your attorney is not necessarily the best person to ask unless your attorney is a tax attorney. Otherwise, you would want to be consulting a tax professional. The average attorney (other than a tax attorney) know very very little about tax.

Sorry. Yes I meant my tax attorney. I will also get a second opinion from a tax professional.

One other thing...in regards to gift-splitting. It is only my sister and me on the deed. If I start gifting my maximum annual amount would I also be able to gift the maximum amount from my husband (totaling $28,0000) even though he is not on the deed.

I will bring this up with my tax attorney also. I just want to be prepared for the meeting with relevant questions.

 

[LdiJ]

Sorry. Yes I meant my tax attorney. I will also get a second opinion from a tax professional.

One other thing...in regards to gift-splitting. It is only my sister and me on the deed. If I start gifting my maximum annual amount would I also be able to gift the maximum amount from my husband (totaling $28,0000) even though he is not on the deed.

I will bring this up with my tax attorney also. I just want to be prepared for the meeting with relevant questions.

No, your husband could not be part of the gift as the home is separate property and he is not on the deed. If you sell it to her and gift principal annually, I supposed he could gift her cash that she could turn around and pay towards the principal, but that's awfully convoluted.

 

[tranquility]

No, your husband could not be part of the gift as the home is separate property and he is not on the deed. If you sell it to her and gift principal annually, I supposed he could gift her cash that she could turn around and pay towards the principal, but that's awfully convoluted.

Since gifts between spouses are not reportable, why couldn't the OP gift the amount of the property to husband who gifts to sister? Of course, it can't be just a scheme. Husband would have the right to keep it if he wanted.

 

[LdiJ]

Since gifts between spouses are not reportable, why couldn't the OP gift the amount of the property to husband who gifts to sister? Of course, it can't be just a scheme. Husband would have the right to keep it if he wanted.

I didn't think of that one...yes, that is possible as well.

 

[SisterHelpPlz]

Sorry to bother you all. I have one last question.

Since my sister has been paying taxes on the property and for the upkeep for the past 16 years is there some way we could structure that so that the gifting is less? Or is that information extraneous?

Thanks for all your help!