Gifting a house to a relative will affect your income tax and real estate property tax. Know the consequences of gifting vs. inheriting.
Q: I thought you might have said on your radio show that you didn’t advise giving a home away. My uncle is thinking of giving me an old house, but I didn’t remember why that was a wrong thing to do. Please can you tell me again, so we don’t make a mistake?
Gifting a House to a Relative
A: If someone wants to give you an old house, or a new house, you should probably say yes. But, I want you to understand how being given a house will affect the federal income taxes you may pay at some point in time on the property.
The questions people face is whether to give a house to their children (or, in this case, niece), or allow them to inherit it after they die. When you give a house, you give the property at its current cost basis. The cost basis is the amount the owner paid for the property plus the costs of purchase, if any, and the cost of any capital improvements that were made along the way. Capital improvements would include replacing the roof, the mechanical systems or the cost of building a new addition. It would not include repainting or redecorating a living room.
Once you understand the cost basis for the home, that would become your cost basis if your uncle gifted you the home. The tax implication comes from the difference between the cost basis and the price you ultimately sell for down the road.
An Example
For example, if the cost basis of the property is $50,000 and you sell the home ten years from now for $300,000, you would show a profit of around $250,000. If the home is your primary residence, and you can still exclude up to $250,000 in profits (up to $500,000 if you’re married on a primary residence), then you would owe nothing in taxes. Let’s say instead that the property is a rental and you have $250,000 in profits. Then you’d owe long-term capital gains tax on the profits plus you’d have to recapture any depreciation you claimed along the way.
If you inherit the property from your uncle, you would inherit it at the current market value, which let’s say is $150,000 today. In ten years, the property might be worth $300,000, but your profit would only be $150,000. If you had the property rented, you’d owe tax on $150,000 instead of $250,000, plus depreciation. So you can see why inheriting property would be better than having it gifted to you.
Gift Tax
There’s another tax issue for the gifter. If you’re given a house for $50,000, that’s above the annual gift exclusion limit, which is $13,000 for 2012 and $14,000 for 2013. So the gifter might have to file a gift tax form with the IRS and have the amount over the $13,000 deducted from the one-time gift exclusion.
The IRS has good information on the gift tax and how it works here. You should also download Publication 950 Introduction to Estate and Gift Tax to understand further how this might affect you or your uncle.
Does the Home Have a Mortgage?
An additional issue for you to consider is whether the home has debt on it or not. If your uncle borrowed money to buy the home and the home has a mortgage on it, you need to know that the mortgage will not go away if your uncle gifts you the home. You or your uncle will still need to make payments on that debt. In any case, due to the transfer of title in the home to your name, the lender may have the right to call the loan in – that is to say, the lender can say that the balance owed on the whole mortgage must be repaid immediately. If you don’t repay the debt, the lender can foreclose on the home and sell the home to satisfy the debt.
Potential for Reassessment
One last item to consider, when you take title to the home, you need to know that in some states, the local taxing body may reassess the value of the home and you may have to pay real estate property taxes at a much higher rate that before. For example, we have relatives in Florida that have lived in their home for thirty years or so and their real estate property taxes are quite low. They know if they sell their home, the new buyer’s real estate taxes will skyrocket.
The bottom line is that getting a house for free is never a bad idea. We just want you to understand what the consequences are of the transfer and what tax implications might be down the line, so you’re prepared when it comes time to sell and move on.
More on Topics Related to Gifting a House to a Relative
Do You Need to Renovate an Old Inherited Home Before Selling?
What’s the Best Way to Divide Inherited Property?
What Happens To Your Taxes When You Sell An Inherited Home?
Is a Free Timeshare a Gift or a Problem?
My father and mother willed a piece of vacant land to me and I have an interested buyer. my mother is still living but signed it over to me. what taxes will I have to pay now it is deeded to me if I sell.
Iam paying 20,000 for a house that belonged to my grand parent, and my uncle until their death. My aunt is selling the house for 20,000 should i receive a tax break for being a blood relative on the house
I would think the difference between $20,000 and the FMV is actually a gift from your relative and if it combined with all other gifts during the year of transfer is greater than $14,000 or $28,000 for a married couple then they are required to file a gift tax return.
Your basis in the house would actually be the FMV at the time of transfer or $20,000 , whichever is higher.
I own several rental real estate properties. Ive taken depreciation on them for a couple of years and their fair market values have increased substantially. I am wondering if I can gift to my mother around $1,000,000 worth of these properties so she can depreciate them for the remainder of her natural life and then get them back at a stepped up basis in 25 years.
Would I owe any recapture on the depreciation ive taken if I gift to her?
I Have a landlord who want’s to sale his house because he owns $30,000 in taxes. He said he would sale the home just to have the taxes paid of.
However I don’t have the money to pay that.
Can He sign over the house to me and relieve himself of this large debt?
Or can he just sign his debt over to me along with the deed to the home?
Also is there anyway I can avoid getting the debt just the house or does The debt have to be paid off in full before the title can be handed over?
If my relative sells me their home for $1 (they don’t owe a mortgage), can I refinance it right away to repair it? Will I have to pay taxes on it upfront? (house is in the state of RI)
If my moms signs over her house to me and she still owes on it will i still have to pay taxes on it or how dpes that work?
My brother gifted me my mother’s house which he owned. My younger brother and sister still live there and pay the taxes and utility bills. If the house is in my name now what am I obligated to pay since I have my own residence.
Hello;
I have a question. If i was going to be gifted a home from my grandfather that i was planning on selling right away how can I avoid paying a crazy amount of taxes. thank you
You would get a carry-over basis I believe. That would be equal to the amount your father paid for the house. If it is a primary residence, I strongly advise your grandfather to sell it and prevail himself of the primary residence exemption on any gains (250k per person or 500k married). Then he can just “gift” you the proceeds he gets. Assuming he has not used up his unified exemption for gift and estate tax.
My boyfriend’s dad is wanting to sign over hiss house to us. It is paid for and there is no mortgage. He then wants us to get a home equity loan on it to repay him for the house. How can we do that and how likely is it that the bank would allow us to do that?
My daughter is being gifted a 100, 000. Dollars of equity of my home . We are waiting for the appraisal. All money I receive will pay off what I owe 40, 000. Dollars us a lien of 9000.00 dollars. Then we will put an apartment for me at 650 dw ft. They will add on n make major home renovations of the remaining a564 sq ft plus their upstairs bedroom bath addition of 520 sq ft. How does this affect any of us. My husband in a nursing g home I signed a spousal refusal a decade ago. His illness he was taken care of by me for 22 yr.s at home. Then my daughter m myself n son not living with is came with a rare form of non operablevno cure cancer disease. So I have my wits about me at 50 but I’m not able to live on my own in a house far from my daughter. Hence the attached apt. What consequences do we face. My husband’s money is his. Mine is mine I’m on the deed only.?????