Conclusion:
There are no problems until you gift over $11,000,000.00 person. No tax to pay by anyone but the gifter has to file a form with IRS if they give more than $15,000.00 to anyone in the same year. Any questions question your tax expert. Do not make gifting decisions after reading anything or anyone online
There are some severe problems if you gift real estate that has been owned for an extended period of time. The word that comes into play is “basis”. The mantra is “Basis follows a gift”.
An Example:
A real estate broker called me some time ago and said that she had a problem. She was the oldest child, and her family decided to have mother sign her home over to daughter to avoid probate. The home was worth about $500,000.00. The mother had purchased the home years ago for about $80,000.00 and had made improvements over the years of about $20,000.00. Her basis would be $100,000.00.
As mentioned before there was no gift tax problem, but the mother should have filed a report to IRS. Now, the daughter discovers that when the property is sold, her mother’s exclusion of $250,000.00 of gain could not be utilized. And even more importantly her basis would be $100,000.00. Her gain would be around $400,000.00 minus selling costs.
If the daughter inherited the home at time of death, the basis in most instances would be stepped up to Fair Market Value of $500,000.00 so no tax at that sales price. Let’s say it one more time. “Basis follows a gift” so see an attorney when transferring property in any manner. If the mother had owned the property with her spouse, and he had died, then the property basis would have been changed at the time of his death. California is a Community Property State so the new basis is stepped-up to market value.
Another Thought:
When anyone inherits a property, it is important that they get an appraisal of the property at that time. This would be valuable in case of any sale or audit.
If the property is a rental, the value would be reduced by any depreciation allowed or allowable.
If a couple can use the $500,000.00 Exclusion and one spouse dies, the surviving spouse can use the Exclusion if the property is sold within two years of death.
So There Are Gift And Estate Considerations In All Transactions
And check with professionals about everything including how to hold title. Also, different states have different regulations so be detailed and thorough in these topics.
And next time we will talk about how the inheriting relative can keep any low County Property Tax Evaluation on the subject property.
This article makes me think of a relatively new too in California for parents with small estates: The Transfer on Death Deed (TOD). With this instrument, some basis problems are avoided, because the child gets the after death stepped up basis. As a lender, I occasionally had a parent who would refinance and add a child to the property title at that time “for convenience” or “in lieu of a trust.” This made two problems. One being basis. The other problem, the child’s credit is burdened by the parent’s mortgage debt, which may limit child’s ability to purchase a home, as well as a vehicle.
That should read “a new tool”.