My parents are gifting me their house. Any suggestions on this?

10 Replies

@Harley Fowler

Is there a specific circumstance that is forcing them to gift it? 

If not, it would be better if you could inherit after death  rather than being gifted. 

If gifted, your basis in the property will be your parents basis. 

If inherited, your basis will be FMV in the property. FMV must be very high because of the market now a days.

It would also depend on how you are going to use the house. If you are going to use the house as primary residence, gifting vs inherited property might not be as relevant when you sell the house because hopefully your gain can be excluded via sec 121 exclusion.

If this is going to be investment, then inherited property will provide you higher depreciation each year and also drastically cut you gain when you sell it. 

Those are the major issues. 

The single largest tax mistakes I see are parents gifting their child the house. They just gifted the child a large tax bill that could easily be avoided.

I highly recommend you seek professional tax advice for your specific situation before you do this.

Originally posted by @Harley Fowler :
@Ashish Acharya they are just planning to relocate and I’m not sure if I want to flip or use it to live in

Other way to avoid tax is, your parent selling the house now if it is their primary residence. There will be no tax when they sell. And then give you the money. There will be no gift tax if your parent have not used 22 million lifetime exemption.

Your selling the houses will have 60k tax impact (see hypothetical case below), them selling will have zero. 

If now, depending if you can wait ( idk how hold your parents are), it would be most beneficial to not gift. We are taking about huge tax bill that can be avoided. 

Let’s say your parent had 

-basis 100k

- FMV now :400k

If they gift you, then your basis will be 100k. And if you sell it right away, then your gain will be 300k. You will pay almost 60k in tax. 

If you wait and inherit it, your basis will be FMV, so there will be no gain or tax.

These are simply an example. 

It might make sense for them to keep the house even if they move. May be rent it out. You can manage it until you inherit it and do whatever you want to. 

If you are ok with paying 60k, take a gift.

@Harley Fowler

If you plan to flip the property - maybe your parents can simply pay you to manage the renovation of the house.

You get paid for the renovation and pay tax on that amount.
Your parents are able to sell the house for more now since its renovated. They increase their basis in the property by the cost of the renovation they paid you which lowers their gain. They may not have any taxable gain to begin with if it is their personal residence and lived in it for 2 out of the last 5 years. However, it depends on what their basis is and what the fair market value of the property is.

Once the property is sold - they can gift you the money in which case you can purchase an investment property.

Win win for everyone

@Paul Allen hello I need some advice. My mom is alive and I am planning on her living another ten years best guess. She owes 40k-500/mo and another 50 k in city financial repairs from 2013 but no payments or interest due until death. My brother 58 lives there for free his whole life and I’m kinda responsible to provide him a place to live after my mom passes away. Home value is approximately 300k. She doesn’t want either irresponsible brothers to be involved in ownership of said 3bd 2 bath Roseville Ca home after she passes. I can buy directly at any price. I’m looking forward to tax liabilities if I just inherit the property? I don’t think I can do a wrap around mortgage but I’m looking to see if the city will allow? I don’t think they will. Maybe a simple will is the answer or trust? I’m not sure what option is the best or how to evaluate? Can you please help? Thanks Bob

Welcome to BP @Robert Cuellar !

You seem to be asking quite a few questions in your post. I can only address the tax-related ones. 

If you inherit the property, there is no tax to you on the transfer of the property to you. If you sell after you inherit you may have to pay capital gains tax, with your basis in the property fixed at the value of the property on the date of death.

Questions on how to ensure the transfer of the property is to you and not your brothers are legal questions. Your mother should consult a lawyer for those answers.

Best of Luck and Happy Holidays!

@Harley Fowler A deed is prepared that transfers title from them to you. Keep in mind they need to file a gift tax return. No gift tax would be owed assuming they haven’t used up their lifetime exemption. They should speak with their CPA