Q: I received a property from a life estate, after my mom passed away. Can I transfer the property or sell it for a dollar with no gift taxes charged to me? My in-laws live in it and now owe three years of property taxes. (I receive no rental income so I asked them to pay the property taxes.)
How can I give them the house without having to pay any gift taxes? I do not want any money for the house. I just want the house out of my name and the headaches that go with it.
A: Has the house passed out of the life estate and into your possession? If that’s the case, and you now own the home, you can sell it or gift the home as you please and the purchaser or recipient of the gift will own the home and be required to pay the taxes on the property. They can also sell the home or give it to someone else.
If, on the other hand, you own a life estate, the home is yours to use for as long as you live. There may be other conditions to the life estate and those conditions along with the limited use of the home during your lifetime will create differences between full ownership and the life estate.
These differences will also cause differences in value. That value is the key to your question. When you inherited the property, you inherited the home at a certain value. If you received the home free and clear, that value will determine your tax consequences should you decide to gift the home to your in-laws. Likewise, if you inherited a life estate, that life estate had a value when you inherited it.
Given the current real estate market, if the value of either the home or the life estate is the same or less than the value from the date you received the home, you certainly won’t have a profit resulting should you decide to sell the home.
But in your case, you want to gift the home. You’ll need to determine the value of the home as of the date you inherited the home.
If the home’s value is below $26,000, you may be able to transfer the home to your in-laws by gift and not worry about any federal gift tax issues. You are allowed to give a gift of up to $13,000 per person this year (2010) without triggering any gift tax reporting requirements. Gifts above that amount can cause IRS reporting requirements and in limited circumstances may even require the payment of a gift tax. However, you would only start to pay a gift tax if that gift or accumulated gifts you have given and are reportable to the IRS exceed the maximum amount this year, which is $1 million.
If the home’s value exceeds the $26,000 value amount, you still have other options of transferring the property to your in-laws without triggering gift tax reporting requirements. You might also keep in mind that if the home is in your name and the name of your wife, each of you can gift your in-laws $26,000 this year. That would give you the ability to gift up to $52,000 of value in the house to them this year.
You might want to talk to an estate planner in your area to make sure you follow state and federal laws. But in certain circumstances, you can set up various types of trusts that can take the title of the home out of your name and either immediately or slowly transfer the value of the home to your in-laws.
Some estate planners could even suggest you transfer title of the home to your in-laws but take a mortgage back for the value of the home. Thereafter, you can forgive on a yearly basis the maximum amount that is permissible to give to each of your in-laws without triggering the gift tax reporting requirements.
There are lots of options and ways in which to get caught in a tax mess. So, please consult with an estate planner in your area to see which plan will suit you best. Gift tax and estate planning issues can be rather complicated and a helpful estate planner or estate attorney can assist you through the process.
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