Can My Mother Gift Me a House Without Paying Tax?
A parent may want to give her child the house she owns when she moves to a smaller place or a retirement home, but both parties should be alert to tax consequences. Homes are considered taxable gifts by the IRS, and such a gift, if over certain thresholds, could incur tax liability for the giver or impact estate taxes later.
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The Gift Tax
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All items of tangible value, including real estate, are subject to gift tax. Everyone has an annual exemption from gift tax of up to $13,000 as of 2011; the amount changes every year. Any gift up to that level incurs no tax from anyone. Nonexempt amounts above this threshold are subject to gift tax less the unified credit. The unified credit eliminates gift tax owed on gifts given from one individual to another individual, and has a lifetime cumulative limit. In 2011, the unified credit offset tax on gifts over a lifetime of up to $1 million.
Estate Taxes
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If you use the unified credit, you should be aware that it may affect estate taxes. Unused unified credit can offset estate taxes during probate. If you use up the unified credit, you may pay more in estate taxes than you should. If possible, it is best to avoid using the unified credit if your estate is large.
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Tax Planning
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You can take advantage of the annual limits in the gift tax to reduce or eliminate taxes on a real estate gift. Instead of giving the entire house in one year, your mother could "sell" you the house. She would have you sign several promissory notes, each in the amount of the current annual gift tax exemption, totaling the value of the house. For instance, in 2011 a house worth $130,000 would require 10 promissory notes worth $13,000 each. Every year, your mother could forgive one promissory note. Be careful about tax rules, as you may incur capital gains tax if you do not live in the house long enough to count it as your primary residence. Because it is easy to make a mistake with the paperwork involved, hire a good financial planner to ensure this transfer is done properly.
Other Considerations
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If your mother is giving you a house to protect it from seizure, you should be very cautious. Medicare, for example, has rules about when a home can be transferred prior to entering a long-term care facility. If the rules are violated, Medicare may not cover care. Bankruptcy and other potential claims against the gifted home may also impact your mother's overall financial liability and even your possession of the house without a lien involved. If this is your situation, consider hiring a financial planner to prevent costly errors.
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