Gift of free house has tax consequences
My father wants to gift my wife and I a house.
He wants to do it as a one-time gift -- not in increments. The home
is appraised at $530,000 and the basis is $12,000. There is currently
one mortgage of $115,000.
Using the unified gift credit of $1 million, would
he have to pay any tax at all or just on the difference between
the $12,000 basis and the original loan amount of $140,000, which
was a cash-out refi many years ago.
Thank you for helping with this matter.
You certainly don't want to look a gift house in the mouth, but
before you saddle up, you need to consider some pitfalls. First,
since your dad's cost in the property is less than his debt, he'll
have a capital gain on the transfer by gift to you. The gain is
the difference between the current debt (the $115,000, not the $140,000)
and his cost basis. The remainder will be gift-tax free based on
the unified credit.
The next issue is your cost in the property. Transfers
by gift receive a carry-over basis (the donor's cost), plus any
gain recognized by your dad. This means your cost basis on a later
sale will be the amount of the mortgage you assume, which includes
your dad's cost. (It's an algebraic equation wherein Dad's gain
= mortgage less cost, or $115,000 - $12,000. So son's cost basis
= Dad's gain plus cost, or $103,000 + $12,000. Therefore the son's
cost basis is the mortgage amount, or $115,000.)
If you hang on to the house for a few years, your
gain at that time might then exceed the maximum exclusion of $500,000
from the sale of a primary residence. Since the numbers are rather
large, I suggest you consult with a CPA on how best to structure
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