Goodspeed: When taxes on gifts kick in
QUESTION:My parents bought their home back in 1998 for $140,000. My dad has since died, and my mom wants to downsize and move into an assisted living facility. She has offered to sell me their house for what they paid for it -- $140,000 -- which is way less than the $400,000 the home is worth today.
My wife and I have two children and live in a small ranch. We desperately need more space, but if my mom sells me her house under the market value, will she have to pay capital gains taxes on the market value?
ANSWER: One way to think about this transaction is as a gift. Your mom sells you her house for what she paid for it - $140,000 - which would not trigger any capital gains taxes on the profit from the sale since there is no profit. She then gifts you $260,000. This gift represents the increased value of the home during the last 23 years.
The IRS allows an individual to give anyone an annual financial gift of up to $15,000 without any tax consequences. This means your mom could give you a gift of $15,000, your wife a gift of $15,000 and your two children gits of $15,000 each for a total of $60,000.
Thus, if your mom sells the house for what your parents paid, even adding in any capital improvements, she will not owe any taxes on the proceeds.
At the same time, your mom has effectively given you a gift of $60,000. As just noted, for federal income tax purposes, your mom can give each member of your family $15,000 annually (for a total of $60,000) without triggering any federal tax reporting or affecting any state tax issue.
The remaining $200,000 would get reported to the IRS as a gift to you. But your mom would not have to pay any gift taxes on that amount. The gift tax return would simply reduce the lifetime amount your mom can give you by $200,000 without paying estate and gift taxes.
Currently, your mom can give you $11,700,000 during your lifetime without paying any federal, state or gift taxes. In other words, if your mom owns less than $11,700,000 in assets, she is likely never going to be impacted by giving you a $200,000 gift.
Linda Goodspeed is a longtime real estate writer and author of “In and out of Darkness.” Email her at: email@example.com.