Gifting Property to Your Children
I receive a large number of email questions on a monthly basis, and try to answer as many as I can. I wish I could respond personally to everyone, but that is not possible.
Although many questions are unique and different, one issue predominates, namely: “I want to gift my property to my children.” Readers will know that under most circumstances, I do not like this idea, as there are usually tax consequences. As I have written many times before (and suspect I will continue to write), “the tax basis of the giver of the property (the giftor) becomes the tax basis of the recipient of the gift (the giftee).”
This means that if the parents bought the house years ago for $100,000 and it is now worth $500,000 (yes, appreciation still happens despite our current economy), the kids’ basis for tax purposes is $100,000. (Of course, if the parents made major improvements, that would increase their tax basis.)
Unless the kids actually end up owning and living in the property for two out of the five years before it is sold, they will have to pay a large capital gains tax to the IRS. In this example, if the kids sold the house immediately after the parents died for $500,000, their gain would be $400,000 ($500,000 minus the tax basis of $100,000). Currently, the federal capital gains tax rate is 15 percent, which means they will have to pay upward of $60,000 to the IRS, plus any applicable state and local tax.
However, if they inherited the property, they would be able to take advantage of the “stepped up” basis, which means that the value of the house on the parents’ death becomes the tax basis of the beneficiaries. Thus, in this example, if the house was sold for $500,000, there would be no capital gains tax to pay.
But now there is yet another problem with gifting the house. The IRS has mounted a major campaign to ferret out unreported taxable gifts. I understand that IRS agents are reviewing thousands of county real estate transactions to determine if the giftor properly filed a gift tax return.
Currently, taxpayers can gift (tax-free to everyone) up to $13,000 to individuals. You can gift this amount to each of your children, and if you are married, both you and your spouse can make similar gifts. However, gifting a house clearly is more than $13,000. If that’s the case, you have to file a gift tax return. There is no immediate tax consequence, but it may impact on your lifetime exemptions. (Check with your local tax advisers for more details.)
The bottom line, however, is that the IRS is watching, and you should be very careful and get good tax and legal advice before you make that gift.
Benny Kass (Housing Counsel), Giving Property as a Gift Require Careful Tax Planning, Chicago Tribune, Jul. 29, 2011.
Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.