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George Saenz, the Bankrate.com Tax Talk columnistGetting land gift from grandma

Dear Tax Talk,
I recently found out that my grandmother would like to give me a piece of land that she owns. It has not been built on. What are the tax ramifications of accepting this gift? Will she or I have to pay taxes on it?

I do not intend to sell the land and plan on building on it someday. Is there a benefit to me simply buying the land instead? Also, can the government take the land back after it's been gifted if she requires government assistance in the future? I appreciate your help with this.

-- Kati

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Dear Kati,
An individual can make annual gifts of up to $12,000 to another individual without having to report the gift. The $12,000 limit is up from $11,000 in 2005, as the threshold is indexed for inflation. Gifts in excess of $12,000 are reportable on Form 709, but individuals have a lifetime tax credit for gifts that allow them to avoid paying gift tax.

An individual can make up to $1,000,000 in reportable gifts (in excess of the annual exclusion amount, i.e., $12,000) and will not have to pay gift tax. Instead the individual uses a lifetime credit to avoid paying the gift tax. If the total of all reportable gifts exceeds $1,000,000 in a lifetime, gift tax would be payable. You may have a tax consequence at the state level depending on the state where the donor resides.

A recipient of a gift never pays federal income or gift tax on the value of the property received. The recipient receives a carry-over basis from the donor. This means the cost basis to you would be the cost to Granny, so that if you later sell the property you'll pay tax on all the appreciation since she purchased it.

One of the major differences between a gift and an inheritance is the cost basis of the property to the recipient. In an inheritance, the cost basis becomes the fair market value of the property at the decedent's death, so all the appreciation prior to this escapes income tax. (A quirk in the tax law changes the rules in 2010 but applies only to estates valued in excess of $1.3 million).

It would follow then that if there is no urgency in receiving the property prior to Granny's death, you might be better off waiting.

If you buy the property from Granny, she'll pay capital gains tax. Hence, a purchase might not make sense unless Granny has unused capital loss carry-overs. I'm not an expert in Medicaid rules, so I can't tell you if the government can take the property or not. But it might be a basis for denying her Medicaid benefits in the future.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.

Bankrate.com's corrections policy -- Posted: Sept. 6, 2006
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