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Giving property to your child

George SaenzDear Tax Talk,
I have a single-family home that is a rental unit. I would like to transfer it to my daughter. The home is free and clear. We have owned it for 25 years. What is the tax, if any, with a quitclaim deed? -- Joe

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Dear Joe,
Even though you've used the rental property for business purposes (i.e. you've depreciated it), you won't have an income tax consequence when you convert it to personal use such as giving it to your daughter. There might be a consequence if you had a mortgage in excess of cost.

Although there is no income tax consequence, there is a gift tax consequence. Gift tax exists so that an individual does not give away his entire estate during his lifetime to avoid estate tax. Estate tax is due when an individual dies owning assets in excess of $1 million in 2002. As part of tax law changes, the estate tax will be phased out by 2010, and the exempt amount is increasing annually until then.

For gift tax purposes, you also get the $1 million exemption over a lifetime. What this means is that for a gift of less than $1 million you won't pay any gift tax. Instead you'll use part of your exemption. A lot of people don't like the idea of using their estate tax exemption, so what they do is structure the gift over a period, using an annual exclusion.

Under the 2002 annual exclusion, you can make a gift of up $11,000 to any one person without having to file gift tax returns and using your $1 million exemption. If you're married, you and your wife can make the gift of up to $22,000 to your daughter, and if she is married, you can make the gift up to $44,000. To structure the gift to avoid going over the annual exclusion, you would make partial gifts over several years. Since this might get complicated, you may want to consider the assistance of a real estate attorney.

-- Posted: Sept. 27, 2002




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