Gifting Single Family Residence to Son: Any tax implications?

Question

Hi Everyone!

My mother would like to gift her $850K house (100% owned; no loan) to my wife & me. At the same time, my wife & I would sell our $1.5M house ($1.4M is equity), and use the proceeds to 1) transfer $475K cash to my mother, 2) remodel her house (which my wife and I will live in) for $150K, build an ADU (which my mother will live in) for $200K, and 3) invest the remainder.

I believe the gifting of the house to my wife & me won't have any tax implications aside from our remodeling that may result in a reassessment with a property tax increase.  I'm concerned, mostly, about tax implications that would arise from my wife and me gifting my mom the $475K.

Any thoughts or suggestions about the entire plan?

Thank you very much.

Eric

Eamonn McElroy · Answer

@Katie Lepore

Michael Plaks · Answer

@Eric Bailyn

Try to reach out to @Brian Schmelzlen, however every tax pro is crazy busy at this time of the year

Eric Bailyn · Answer

Hi Katie - Thank you very much for your post.  I truly appreciate how people take time to help complete strangers.

I would like to clarify something you mentioned.  You said that "this can represent BIG dollars".  Were you referring to the the gift tax as potential big dollars, and that this can potentially be avoided due to the parent/child exclusion?

Whether this entire transaction will be a part gift/part sale transaction is something that I don't have a good understanding of, and will include in my discussion with an attorney/CPA.

Katie L. · Answer

@Eric Bailyn

You have gift tax issues, income tax issues, and whether you fully realize it or not, property tax issues.  Seems you are aware of some of the property tax implications, but you didn't mention some of the biggest ones you'll want to be cognizant of, including the parent/child exclusion.  For my clients, this can represent BIG dollars, especially since it happens year over year, unlike capital gains which is usually a one-time recognition event.  It sounds like you are talking about a part gift/part sale transaction.  What you're talking about is actually a pretty complex transaction and has a lot of moving parts.  Depending on how you structure it, there could be pros/cons in different ways.  You'll want to be cognizant of your basis in each of the different options as well, which will affect you later down the line, and also consider making use of the 121 exclusion from capital gains as others have mentioned.

*This post does not create an attorney-client or CPA-client relationship.  The information contained in this post is not to be relied upon.  Readers are advised to seek professional advice.

Eric Bailyn · Answer

Thanks Michael.  I just reached out to Brian.

Art P. · Answer

Unfortunately I don't have a recommendation for you in San Diego.

@Eamonn McElroy @Michael Plaks @Ashish Acharya

Do any of you have recommendations on any RE CPA/EA in the San Diego area?

Eric Bailyn · Answer

Again...Thanks for taking so much time to help me with my situation.  I'm 100% convinced that I need help with this.  Do you know someone in the San Diego area that you would recommend for helping me with the different scenarios?

Art P. · Answer

@Eric Bailyn

There are plenty of variables that need to be considered given you and your mom's financial situations and what makes the most sense. There is no one size fits all and multiple factors should be taken into consideration.

The most tax advantageous solution is to inherit the house from your mom on a stepped up basis.

If your purchased property has appreciated and you are taking the home sale gain exclusion and have no additional capital gains above the limit, you can set your basis on the property (consider property taxes on the price paid). If title trades hands, the county could reassess the home to market value and you may be paying double the property taxes your mom was paying on her own.

I would sit with a CPA and run through multiple scenarios and how it will impact your cost, basis, gift exclusion limits, and estate planning.

Another option is to keep the property in your mom's name and formally loan the amount needed to your mom to make necessary capital expenditures, she will only be assessed the additional improvements based on permits pulled to keep it below assessed market value decreasing property taxes. When she passes (hopefully not any time soon), you step up in basis in the property at whatever the market value is at that time.

If you buy the property from her for $555k, as you mentioned she is single, she can max out the home sale gain exclusion (305k basis + $250k exclusion) to effectively pay no capital gains. This does increase the assessed value and increases property taxes paid going forward. You may also increase the assessed value when you make the improvements at a later date. But at the $555k basis + $350k in additions/improvements, you will need to hold it until the property is valued at $905k before you recognize capital gains. Personal property does not benefit you at a loss.

As you can see there are multiple options to consider, if you get the sale through, you can tax plan with trusts to move the money she wants to gift you over time, or she can gift you the full amount using the life-time gift exclusion limits without you having to gift any back to her.

Eric Bailyn · Answer

Thanks Colleen.  I'm sure you're right about needing to see a lawyer/accountant.

Eric Bailyn · Answer

Hi Art - Excellent information.  Thank you very much.

My mother and I are functioning entirely within CA, and the cost basis, for her house, is $305K, It is now worth $850K; therefore, if she gifts us the house, future additional housing increases will incur capital gains tax (as the capital gains are already in excess of the $500K exclusion).  Does it make sense to buy it from her for $475K (or even up to $850, which I'll have from the sale of my house), thereby raising the cost basis, and reducing future capital gains tax.  I would think that avoiding all of the capital gains is preferred over incurring additional property taxes (1.2% per year), but I'm not really sure.

On the other hand, neither my mother or my wife/me have assets anywhere near $11.4M, in fact, both of us are probably in the $1-2M net worth range without any prospect of a substantial change; therefore, I'm not concerned with preserving the lifetime exclusion.

I would really appreciate any further input you may have...

Sincerely,

Eric

Gifting Single Family Residence to Son: Any tax implications?

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