Nevada City Virtual Tour

Tuesday, February 4, 2014


A parent has owned a home for a long time, and their purchase price plus improvements is much less than a current sales price. A broker called me to tell me that they had a problem. "To avoid probate, the mother had put the daughter on title as a joint tenant. Upon death the daughter would inherit the property."
Now, the mother wants to sell and use her $125,000 Exclusion of Capital Gain. However, the daughter now owns half of the property. When the property was gifted, there is another rule. Basis follows a gift. So the daughter's half had the low basis of half of the purchase price. In a sale the daughter cannot claim the Exclusion, so she will pay some tax.
If they transfer the property back to the mother, the mother will only be able to exclude gain on half of her sale. She has not been on title on the daughter's half for the last two years.
Another scenario: Mother and father were going into an assisted living arrangement and put their two children on title. The children get the basis at time of transfer and if they sell, they pay tax with no exclusions.
When does basis go up to fair market value? At time of death, and that is one rule to remember. Real Estate Professionals: When you hear of a client's parent passing away, you might want to send them a CMA as this might illustrate to the IRS the value at time of death.
Conclusion: Before ever gifting any real estate, talk to a Real Estate Tax Professional, not the next door neighbor or work associate or Seminar Speaker who thinks they know tax rules.
For 2013 the per-donee exclusion is $14,000 per taxpayer so a couple could give $28,000 gifts to several people and no tax effect on anyone.
If there is any tax involved on gifts, the giver is responsible.
Gifts must be present interests, not future interests.
The gift and estate tax basic exemption is $5,250,000 for 2013 and the top tax rate is 40%.
All gifts to spouses are non-taxable.
If I make the first gift of my life to my son of $200,000 in 2013 will there be any tax. I can eliminate tax even though it is over $14,000 because the liability computed on IRS Form 709 can generally be avoided by applying the lifetime credit. That $5M plus credit can be used for excess gifts during your lifetime, it just lowers your estate tax exemption.
There are unlimited exclusions for payments of another qualified persons (family members) tuition or medical expenses.
Basis follows a gift. Translation: If my basis on a rental property or property I don't live in is $240,000 and the fair market value is $600,000, the gift-getters basis will be $240,000 and if they soon thereafter sell, they will have a gain of... $600,000-$240,000=$360,000 taxed AT 15% FEDERAL PLUS any state capital gain taxes. California is at 10%. That's 25% capital gains to pay on the profit of $360,000 in California. Get your calculator and sit down and take a deep breath. You will not be happy.
BTW, I just purchased my J. K. Lasser's "Your Income Tax 2014". Pick one up as there is a lot of interesting information on your taxes for 2013. Yes, you can search the Internet for answers, but I find this book invaluable.
Conclusion: Before ever gifting any real estate, talk to a Real Estate Tax Professional!

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