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by Michael Lodge
Several clients of our firm have asked the question about parents gifting their home to their children, what are the tax issues associated with it. I found this excellent article on gifting your home to your children. I hope this helps you.
Generosity is an admirable trait, and sometimes there are practical considerations that make it a good idea as well. If you give your house to your child, however, it’s a pretty significant gift, so it can trigger some tax consequences. Gifts of real estate to your child are not tax deductible, so the tax issues are all in the nature of expenditures, not savings.
For tax purposes, a gift is anything you give without equitable remuneration. In other words, if you give your child your house, it is considered a gift unless she gives you something in return, and her undying gratitude doesn’t count. What she gives you must be equal to the home’s fair market value. If you give her a house worth $300,000 and if she does not give you cash or property worth $300,000 in return, the Internal Revenue Service considers the house a gift, and gifts may have tax consequences for the giver. As of 2012, you can give $13,000 annually to anyone you like, tax-free. If you’re married, you and your spouse can each give $13,000 per person. Unless your $300,000 home has a sizable mortgage against it, giving it away will probably go over these limits.
The Unified Credit
You have a choice between paying the gift tax in the year you give the house to your child, or you can use your unified tax credit to avoid paying it. As of 2012, the credit is $5.12 million, which you can use over the course of your lifetime. Assuming you give away less than $5.12 million in your life, you would never have to pay gift taxes for your generosity if you use the unified credit to cover each gift in excess of the yearly exclusion. However, there’s a catch. The same credit also applies to your estate taxes – you can use it to exempt up to $5.12 million of your estate from taxation when you die. If you whittle away at the credit over the course of your lifetime by giving tax-free gifts, there will be less left to protect your estate from taxation when you die.
Capital Gains Tax
If your child lives in the house and never sells it, she will never pay capital gains tax. If she profits from the gift, however, capital gains taxes may come into play. This is a tax on the difference between the home’s basis and its eventual sales price. For gifting purposes, the basis of the home is what you purchased it for, not its value at the time you give it to your child. Therefore, if you purchased the home for $50,000 many years ago, and if she ultimately sells it for $400,000, $350,000 thousand of that profit would be subject to capital gains tax. As of 2012, the IRS allows a $250,000 exclusion if she uses the home as her primary residence for two of the five years preceding its sale, but she would have to pay capital gains taxes on any profit over that.
Compared to capital gains, gift, and estate taxes, property taxes may seem negligible, but they vary a great deal by region. For example, Marin County, California has some of the highest property taxes in the country. When you gift your home to your child, she becomes responsible for these as well. You can voluntarily pay them for her, but if she’s the owner of record, she’s ultimately responsible for them.
by: by Beverly Bird, Demand Media