Q: What are the tax implications of gifting a home to your children?
My parents are going to gift one of their properties to me and my adult disabled child. There will be a substantial capital gains tax on this property. How do we go about transferring ownership without a realtor? When and how will this capital gains tax be due?
A: Your parents might incur a gift tax for the amount of the gift over $60,000 ($15,000 x2 recipients x 2 grantors), but it is not likely because together they have an approximately $22 million lifetime exemption.
The two of you (gift recipients) will inherit your parents' basis in the property, which is the amount they paid for it plus any capital improvements and possibly less depreciation if they ever used it in a business. When you go to sell the property, your realized gain is the excess of the sale price over the basis that you carried over from your parents. However, you will be entitled to a $250,000 exemption if you own the home and live there at least 2 of the 5 years preceding the date of sale. The capital gains tax, if any, will be due April 15 of the year following the year in which the sale takes place.
There are more tax efficient ways for your parents to transfer ownership of the property to you. Direct gifting of outright ownership during their lifetimes is not one of them, especially given your own daughter's condition. Your parents should talk to an experienced estate planning or elder law attorney about this.
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A: When a property received by gift is sold, capital gains taxes are due on the difference between the net sale price and the value of the property at the time of the last prior sale -- not at the time of the gift. As the years pass, this could be hefty.
In contrast, if a property received by inheritance is sold, capital gains taxes are due of the difference between the net sale price and the value of the property on the date of death. There is often little difference between the net sale price and the value of the property on the date of death.
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