Dear Real Estate Adviser,
My mother is planning to buy a home for me but she isn’t sure of the best way to do this:
- Buy the home outright in her name and place it in a trust for me (her adult daughter).
- Just buy it as a gift.
Which would have the fewest tax implications?
I’ll assume that this is a cash-heavy deal and your mom already has the means and the retirement security enabling her to do this for you. In that case, it seems the least complicated strategy for you both, and certainly the most favorable one for you, would be for your mom to simply buy the home and give it to you as gift.
No gift tax (probably)
While mom would have to report that gift on IRS Form 709 because it exceeds the annual $14,000 per-individual tax-free giving limit, she likely won’t have to pay any gift tax on the home because she probably won’t reach the maximum federal lifetime-gifting threshold, unless she’s quite well off. As of 2015, this “unified credit” allows an individual to give lifetime aggregate gifts up to $5.43 million — including what’s passed on from that person’s estate — without owing federal gift tax.
Your mom won’t be able to deduct this gift on her taxes, of course, because it’s not a deductible charitable contribution. And you, devoted (and fortunate) daughter, won’t have to report it nor pay taxes on it. Good deal for you!
But if your mother wants to enjoy some of the tax benefits of owning this home as a rental (especially if she is actually approaching those combined lifetime giving limits when her estate is settled), she could buy it and charge you a nominal rent to occupy it, then gift you a percentage of ownership worth $14,000 each calendar year until you own it. If your father is still in the picture and has the means to participate in this gift jointly, he could add another $14,000 gift yearly. This strategy would pay for a $200,000 home in about seven years.
The trust option
Alternatively, a qualified personal residence trust (QPRT), which is more commonly used in longer-range estate planning for heirs, might come into play as another way for her to control the house — or live in it — for any set period she designates. This also removes the value of the home from her estate.
Bone up on your new responsibilities before you take ownership. In some cases, cash-poor children encumber such gift properties with mortgages, then strip the equity and let them go into foreclosure. Some gift recipients mistakenly believe a debt-free home is a self-sustaining entity. Beside property maintenance, you will responsible for property taxes, home insurance, utility costs, any homeowners association dues and other expenses. Also, the home in your name would be exposed to your creditors if you have any. If you’ve got outstanding taxes, or have been successfully sued for any reason such as an auto accident, or were to declare bankruptcy, your house could be attached to such action.
Additionally, when it finally comes time to sell, you’ll be obligated to pay capital gains taxes on some or all the difference between the home’s value when your mom bought it and the sale price you get for it.
Obviously, there are many financial variables here and some tax laws that are in flux. While this is a friendly transaction, it isn’t the sort of thing where you two can afford to scrimp on representation. A veteran estate planner or real estate attorney, tax attorney, accountant or similarly qualified professional can advise your mom on the absolute best strategic course to take with her generous gift.
Make your mother proud. Good luck!
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