Lawrence, KS asked in Tax Law, Estate Planning and Real Estate Law for Kansas

Q: If my parents deed a house to me, I cash out refinance to pay them, do we pay gift taxes or they pay Cap. Gains Tax?

So my parents paid cash for a house for me. Instead of doing a traditional loan, if they were to deed the house to me and I cash out refinance to give them the money they wanted for the house and I can use the rest of the cash for improvements or paying off debts.

would they pay gift tax for giving me the house, and then I pay gift tax giving them the money they wanted?

I read that the gift tax only applies if they do not get paid for the gift. So I would assume that they would instead just pay capital gains on what they make over the purchase price and investments into the property before the transfer.

Is this true?

1 Lawyer Answer
Scott C. Stockwell
Scott C. Stockwell
  • Estate Planning Lawyer
  • Lawrence, KS
  • Licensed in Kansas

A: If your parents transfer the house to you, you take out a loan and pay to them a part of the fair market value of the property, the difference between the fair market value and your payment is a "gift." Your parents' gift does not create a taxable event for you. Your parents may have to file an informational gift tax return, depending upon the amount of the gift. If the amount of the gift a parent makes to a child is less than the annual exclusion ($14,000 for 2017), no informational gift tax return is required. Each parent may make a $14,000 gift to you for the calendar year, so a total of $28,000 could be transferred to you by your parents without a gift tax return. If your parents made a gift to you and your spouse, a total of $56,000 could be transferred to you and your spouse without a gift tax return being required (if the paperwork is properly drafted). If the amount given is more than $14,000 per individual-individual gift, then a gift tax return needs to be filed. Each of your parents may make gifts in excess of the annual exclusion during their lifetime and at death in a combined total amount of $5.49 million (as of 2017). So, in summary, each of your parents must report to the IRS each year they make gifts to individuals in excess of $14,000 (adjusted annually by law). If the total of the gifts they have reported and the amount distributed in their estate totals less than $5.49 million (as of 2017, adjusted annually by law), there will be no unified gift and estate tax owing. You and your parents should have the assistance of an attorney and an accountant to ensure the transaction is handled and reported correctly.

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