Do you understand these statements and why? If not, keep reading—three quick articles follow that will clear things up.

• “If I gift my son more than $17,000 this year, I will owe taxes.” Wrong

• “It is good tax planning in most cases for a Senior Citizen to gift a long-owned home to avoid probate.” WRONG

• “A lender can get a judgement against a borrower on a nonrecourse home loan by doing a Judicial Foreclosure.” WRONG

Still confused? Don’t worry. Read the three short posts following one another for clarification.

MORE FACTS ABOUT GIFT TAX

AND ESTATE TAXES 

• Tax basis in a property becomes an important question when gifting or transferring property. I have seen so many problems arise when someone gifts or inherits a property. 

• To illustrate my point I will present you with an example. Many times a child will have a parent gift them the family home to avoid probate.

• Betty had her mother, Dawn, gift her home to her that had been purchased many years before. Dawn’s tax basis was much lower than the value of the property. 

• The tax basis is calculated by adding the purchase price of $100,000.00 to the improvements made during the ownership years of $20,000.00 for a current basis of $120,000.00. There has been no depreciation allowed on the building and no insurance reimbursements were received. The current value according to a recent appraisal is $800,000.00. 

• Betty’s tax basis will be $120,000.00 when she receives the gift. If she sells the property anytime soon, she will have to pay a considerable amount of tax. She can not use the $250/$500K Exclusion as she has not lived in the property for two of the last five years. Dawn can no longer use that Exclusion because she is no longer on title. 

• If Betty had waited until her mother passed away and she inherited the property, her basis would be $800,000.00. In California there is a “Full Step Up in Basis” at time transfer after death. BTW, if you receive a property by transfer, be sure to get an appraisal or at least a Comparative Market Analysis so you have some evidence of the value at that time. 

• Betty could sell the property immediately and probably have no gain. If she moved into the property or rented it, she would have the basis of $800,000 to start and if she added improvements, her basis would increase.

• So let’s repeat our two mantras. Basis Follows a Gift and Full Step Up at Time of Death. 

• When considering any tax move, talk to a respected tax advisor. One of the first steps will be to calculate the basis in any property before any decisions.

• There are times that the basis could be even lower than expected. For example a property had been rented and depreciated. If a property was acquired in a 1031 Tax Deferred Exchange and some gain was transferred to the acquired property.

• If a property was recently acquired or has had little appreciation, gifting would not be such a problem.

• And another thing to consider when making these transfer decisions is the current Property Tax Assessment. The current low assessment might be transferred if the recipient converts the property to their residence and may not be transferred in other cases. So says the 2021 State Proposition 19. 

• And there is a possibly a better method to handle these situations. A proper Will and a Living Trust. 

• So to repeat myself again. Get professional advice even when you think that you know everything. Do not rely on some ideas you read in an email, on Facebook, TikTok, etc. 

The money you save could be your own. There is so much to learn and so little time.