One aspect that is often times over looked is the "stepped up basis". For a home gifted to a child, prior to the owner/parent's passing the basis of the parent becomes the basis of the child. For a property owned a very long time this could be a tremendous amount if the parent owned the property for say 50 years. The value/basis 50 years ago could be a relative pittance to the value today. For example a house sold 50 years ago for $25,000 could in some areas be worth $500,000 today. The child's basis in the property would be the same as the parents basis.
However, one of the biggest tax breaks in the code, at least in the top 3 favorable tax breaks is the "stepped up basis." Taking the same example of the $500,000 house, the basis of the child if the property is inherited, the owner parent has passed, would be the value on the date of death.
If the property was sold today in the first case above the tax would be on a gain of $500,000 minus $25,000 or $475,000 taxable gain.
If the property was sold today in the second case above the tax would ZERO.
The most straight forward way to transfer the property is with a Quit Claim deed. I would advise checking with your tax pro, as there are gift tax implications on the transfer. That being said, the lifetime exclusion would most likely eliminate any taxes.
Not sure, but the donor will be subject to gift tax on anything over $14k or $28k if (husband & wife) own the property together. Those exclusion limits are as of this year. The donee may agree to pay the tax under special circumstances per IRS.
EDIT - I didn't realize there was a lifetime exclusion. Title companies don't like Quitclaim deeds in Tx.
I think Bill Gulley mentioned how to gift a % of property ownership year by year so that the gifting per year never reached the taxable limit. Not necessarily the easiest but probably the best as far as minimizing the tax impact.
Yes, what ever the exclsion is as may apply, to the value, you can git a % that falls under the gifting exclusion each year, that would be a pretty nice property. Better hurry up to as there are look back periods for health benefits and estate planning, see your attorney. :)
Put them on the title and over time give them more and more of the home. OR as Bill Walston said just gift it via quit claim and file a gift tax return. No tax due unless it is an extremely significant amount
As others above mentioned a gift tax return will have to be filed. Publication 590 cites a $1,772,800 gift tax credit in 2012 that is likely close to the number for 2013.
One aspect that is often times over looked is the "stepped up basis". For a home gifted to a child, prior to the owner/parent's passing the basis of the parent becomes the basis of the child. For a property owned a very long time this could be a tremendous amount if the parent owned the property for say 50 years. The value/basis 50 years ago could be a relative pittance to the value today. For example a house sold 50 years ago for $25,000 could in some areas be worth $500,000 today. The child's basis in the property would be the same as the parents basis.
However, one of the biggest tax breaks in the code, at least in the top 3 favorable tax breaks is the "stepped up basis." Taking the same example of the $500,000 house, the basis of the child if the property is inherited, the owner parent has passed, would be the value on the date of death.
If the property was sold today in the first case above the tax would be on a gain of $500,000 minus $25,000 or $475,000 taxable gain.
If the property was sold today in the second case above the tax would ZERO.
To piggy back on what David said; Since Texas is a community property state, the step up in basis will occur in the event of either parent's death. Some people get this confused and think that you only get 50% step up on first death but that is not correct, in a community property state your step up in basis occurs 100% in either death of one spouse. To avoid the gift limits your parents should put in each of their wills the inheritance of the home or property they want you to have and to make this happen on the death of the first spouse; that way you can receive the house at the then current value. If you receive the house through gifting you will also inherit the current cost basis of the house including depreciation if applicable and thus lose the step up in basis.
I've seen gifting where neither the gifter or giftee, had even heard of the stepped up basis, either doing this on their own or with poor advice. I've also seen where later the parent to child deed transfer is reversed and the property goes back to the parent.
I think its a shame that some times people shot themselves in the fot with out even knowing it, sometimes for years.
For you tax guys, how about the possibility of doing a life estate unless that parent doesn't wish to reside in the property until their death?
Yes, you can do that, but that only allows usufruct of the property without an ownership interest, they can't sell it and they pay not pass it along as it reverts back to the estate. May or may nor be what you intend to do. For example, you could give your sister a life estate allowing her to stay in the home and use it, she can't encumber it or transfer her rights. Upon her death it reverts back to your estate and heirs. Also called a "life tenancy" :)
A Life Estate in its usual form has a deed from the parent to the child, with the reservation of a Life Estate for the parent.
I'm not an accountant and am not pretending to be one, but it would seem to me that the deed transfer was be considered a sale for tax purposes. And further it would seem to me not to have the benefit of the stepped up basis. So when it came time for the child to sell the property there would be a larger and in some cases a much larger tax bill.
In addition Life Estate properties are sold essentially at a discount that is figured out by actuary tables based on the sellers age and gender. since you would be getting the property at a discount, it would seem to me that would increase your gain and therefore the tax when you sold the property.
So not only are you abandoning the stepped up basis, you are actually lowering the basis by the discount of the Life Estate.
We bought a property that had a Life Estate. It was being sold by the Bank executor of the remainderman's estate. In this case the remainder holder died before the tenant of the life estate. The "free rent" that the tenant was granted by the Life Estate some 16 years earlier continued on under our ownership. The tenant was 25 years older than the remainderman. The Life Estate was an encumbrance on the property and dissuaded other prospective buyers from the property. But not us. The tenant had lived on the property for 86 years and was 98 years old when we bought the property. (Chapter 74)