Tax ramifications - parent adding child to home title?

Discussion in 'Tax' started by Plin321, Nov 17, 2004.

  1. Plin321

    Plin321 Guest

    My father recently added me name to the title on a house in
    CA, so now it it under his and my name. My mom passed away a
    few years ago and the title used to be on both of their
    names.

    My question is, what are the tax consequences to me:

    1. This year (the year in which he added my name to the title)?
    2. If he were to relinquish his name and sign the title solely to me?
    3. If I were to then sell the house and reinvest in another house?

    Is there a step up in basis in this situation?

    Thanks in advance for any help.

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    Plin321, Nov 17, 2004
    #1
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  2. Plin321 wrote:

    > My father recently added me name to the title on a house in
    > CA, so now it it under his and my name. My mom passed away a
    > few years ago and the title used to be on both of their
    > names.
    >
    > My question is, what are the tax consequences to me:
    >
    > 1. This year (the year in which he added my name to the title)?


    It depends on why he did it. If it was to pay or reward you
    for something you did for him, it could be taxable income.
    If it's just for convenience as a way to avoid probate (not
    recommended for that purpose, by the way, due to possibly
    higher income tax later), there should be no income or gift
    tax ramifications.

    If he did it just because, it's a gift. No taxable income
    to you, but if it's worth more than $11,000 your father
    should file a gift tax return.

    > 2. If he were to relinquish his name and sign the title solely to me?


    Again, it depends on why. In general it would be considered
    a gift, subject to gift tax but not income tax.

    > 3. If I were to then sell the house and reinvest in another house?


    Ah, then you pay lots of income tax - at least more than if
    you wait to inherit it after he dies and then sell.

    > Is there a step up in basis in this situation?


    Heavens no! Well, unless it was transferred to you for
    convenience, only as a way to avoid probate. And then you'd
    get no step-up in basis until after your father dies.

    Stu

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    Stuart Bronstein, Nov 18, 2004
    #2
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  3. Plin321

    MTW Guest

    Plin321 wrote:

    > My question is, what are the tax consequences to me:
    >
    > 1. This year (the year in which he added my name to the title)?


    Assuming that your father cannot unilaterally REMOVE your
    name from the title, this would represent a "completed"
    gift, and he would need to file a gift tax return if the
    value of the half interest is more than $11,000.

    > 2. If he were to relinquish his name and sign the title solely
    > to me?


    Again, this would likely be a reportable gift.

    > 3. If I were to then sell the house and reinvest in another
    > house?


    Your basis (while your father is still alive) would be your
    father's basis (no step-up in the case of gifts). The basis
    MIGHT be stepped up after his death IF he has retained a
    "life estate" interest in the property. This gets
    complicated and your father should really seek competent
    tax, legal and estate planning advice.

    P.S. WHY is your father doing this?

    MTW

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    MTW, Nov 18, 2004
    #3
  4. Plin321

    sftydvr Guest

    (Plin321) wrote:

    > My father recently added me name to the title on a house in
    > CA, so now it it under his and my name. My mom passed away a
    > few years ago and the title used to be on both of their
    > names.
    >
    > My question is, what are the tax consequences to me:
    >
    > 1. This year (the year in which he added my name to the title)?
    > 2. If he were to relinquish his name and sign the title solely to me?
    > 3. If I were to then sell the house and reinvest in another house?
    >
    > Is there a step up in basis in this situation?


    In general and for a typical California residence ownership
    situation over time what you describe can be a poor move
    income tax wise. It may cost you dearly in taxes when you
    make changes later. Did a professional tax or real estate
    person advise this move?

    A lot depends on details and plans not stated. It starts
    with, did your mom and dad hold the home as community
    property. If they did, when you mom died the whole basis
    stepped up to FMV as of that date for your dad, the owner.
    Frequently, that's a significant jump, which erases hundreds
    of thousands of capital gain.

    Also it depends on whether your dad wants to keep the house
    as his home for the foreseeable future and/or until he dies.
    If he kept it himself and willed it to you, you would get
    the stepped up FMV at his death. If he kept it himself and
    meets the live-in requirements and sells it before the value
    increases more than $250,000 from the FMV at Mom's death –
    Community Property held. He keeps it all.

    If your parents didn't hold it as community property (a very
    typical mistake – we've had have community property with
    right of survivorship as a choice for a few years now), then
    things don't work out as well. Half steps up and half keeps
    the old basis, typically

    Maybe there is a reason why he added you to the title but if
    it just sounded like a good idea, look again carefully. I'd
    say go over what's been done and his plans with a tax
    professional. If you don't have an appraisal in the file
    showing FMV at key dates, that's a place to start. Making
    good choices in this area can mean a big difference tax
    wise.

    If your whole thrust is just how to handle gift taxes, I'll
    leave it to someone else to address.

    BC

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    sftydvr, Nov 18, 2004
    #4
  5. Plin321

    sftydvr Guest

    (Plin321) wrote:

    > My father recently added me name to the title on a house in
    > CA, so now it it under his and my name. My mom passed away a
    > few years ago and the title used to be on both of their
    > names.
    >
    > My question is, what are the tax consequences to me:
    >
    > 1. This year (the year in which he added my name to the title)?
    > 2. If he were to relinquish his name and sign the title solely to me?
    > 3. If I were to then sell the house and reinvest in another house?
    >
    > Is there a step up in basis in this situation?
    >
    > Thanks in advance for any help.


    In general and for a typical California residence ownership
    situation over time what you describe can be a poor move
    income tax wise. It may cost you dearly in taxes when you
    make changes later. Did a professional tax or real estate
    person advise this move?

    A lot depends on details and plans not stated. It starts
    with, did your mom and dad hold the home as community
    property. If they did, when you mom died the whole basis
    stepped up to FMV as of that date for your dad, the owner.
    Frequently, that's a significant jump, which erases hundreds
    of thousands of capital gain.

    Also it depends on whether your dad wants to keep the house
    as his home for the foreseeable future and/or until he dies.
    If he kept it himself and willed it to you, you would get
    the stepped up FMV at his death. If he kept it himself and
    meets the live-in requirements and sells it before the value
    increases more than $250,000 from the FMV at Mom's death –
    Community Property held. He keeps it all.

    If your parents didn't hold it as community property (a very
    typical mistake – we've had have community property with
    right of survivorship as a choice for a few years now), then
    things don't work out as well. Half steps up and half keeps
    the old basis, typically

    Maybe there is a reason why he added you to the title but if
    it just sounded like a good idea, look again carefully. I'd
    say go over what's been done and his plans with a tax
    professional. If you don't have an appraisal in the file
    showing FMV at key dates, that's a place to start. Making
    good choices in this area can mean a big difference tax
    wise.

    If your whole thrust is just how to handle gift taxes, I'll
    leave it to someone else to address.

    BC

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    sftydvr, Nov 18, 2004
    #5
  6. Plin321

    Herb Smith Guest

    (Plin321) wrote:

    > My father recently added me name to the title on a house in
    > CA, so now it it under his and my name. My mom passed away a
    > few years ago and the title used to be on both of their
    > names.
    >
    > My question is, what are the tax consequences to me:
    >
    > 1. This year (the year in which he added my name to the title)?


    A non-taxable GIFT to you, including 1/2 the adjusted basis
    for the property. That basis was stepped up on the date of
    your mother's death. Your father needs to file a Gift Tax
    Return (Form 709) if the FMV of the gift is over $11,000.

    > 2. If he were to relinquish his name and sign the title solely to me?


    A MUCH bigger gift, but still non-taxable to you.

    > 3. If I were to then sell the house and reinvest in another house?


    Pay capital gains on the difference between selling price
    and adjusted cost basis (taking selling costs in mind). What
    you do with the funds is irrelevant, but there is no tax
    break for reinvesting in another house. However, if this
    property is a rental, you might be able to arrange a
    tax-deferred 1031 EXCHANGE to another rental property.

    > Is there a step up in basis in this situation?


    No, a basis stepup only occurs when you inherit an asset,
    not receive it as a gift.

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    Herb Smith, Nov 18, 2004
    #6
  7. (Plin321) wrote:

    > My father recently added me name to the title on a house in
    > CA, so now it it under his and my name. My mom passed away a
    > few years ago and the title used to be on both of their
    > names.
    >
    > My question is, what are the tax consequences to me:
    >
    > 1. This year (the year in which he added my name to the title)?


    None, it's a gift to you, and gifts are taxable to the
    giver, not to the recipient. Unless this is a mighty unusual
    house for California, a gift of half a house will mean your
    father will need to file a gift tax return and use up some
    of his lifetime unified credit.

    > 2. If he were to relinquish his name and sign the title solely to me?


    Still no taxable consequences for you, only for him. If it
    is a valuable house, then the gift will eat up a large part
    of his lifetime unified credit.

    > 3. If I were to then sell the house and reinvest in another house?


    Taxable to you, unless you live in it for two years in order
    to qualify for the capital gains exemption (then any gain in
    excess of $250,000 is taxable). The problem is that his
    basis becomes your basis (unless, in a situation that would
    be rare indeed in California, the house is now worth less
    than his basis: then figuring basis becomes more complex,
    because there are rules that prevent giving away a tax
    loss).

    Since you step into his holding period as well as his basis,
    the gain would be long-term (unless he acquired the house
    just recently, and you were to sell soon, or if the rules on
    a gift at a loss were to apply).

    If he bought for $50,000 thirty years ago, it's now worth
    $500,000, and he gives you the whole thing, he makes a
    taxable gift of $500,000 less $11,000 = $489,000, and you
    receive a house with $50,000 basis. If you sell it
    immediately, you owe capital gains tax on $450,000 of
    long-term gain. If you live in it for two years and then
    sell for $500,000, you owe capital gains tax on $200,000.

    > Is there a step up in basis in this situation?


    Not unless your father paid gift tax on the transfer. That's
    one of the reasons not to do it in the first place.

    There are ways to arrange transfers of real estate and other
    valuable property such that as much as possible goes to your
    children, as little as possible goes to the taxman or
    Medicaid, and it's protected as best it can be from your and
    your children's creditors. You have to get expert advice in
    advance to take advantage of any of these: lawyers who
    practice elder law and financial planners have the
    background to do this. Asking after the fact may reveal
    instead that you scored an expensive own-goal.

    --
    Chris Green

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    Christopher Green, Nov 22, 2004
    #7
  8. Plin321

    D. Stussy Guest

    Plin321 wrote:

    > My father recently added me name to the title on a house in
    > CA, so now it it under his and my name. My mom passed away a
    > few years ago and the title used to be on both of their
    > names.
    >
    > My question is, what are the tax consequences to me:
    >
    > 1. This year (the year in which he added my name to the title)?
    > 2. If he were to relinquish his name and sign the title solely to me?
    > 3. If I were to then sell the house and reinvest in another house?


    1 & 2) That's going to depend on whether you should have
    been added as a result of your mother's will or family trust
    document, both which are common in CA. However, if you had
    no share of the property from her death and he just simply
    added you, Questions #1 and #2 could invoke gift tax, but
    per Proposition 58 from the 1970's era, there is no change
    in property tax.

    3) You are thinking of the law that was replaced in 1997.
    Reinvestment is irrelevant.

    > Is there a step up in basis in this situation?


    No.

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    D. Stussy, Nov 23, 2004
    #8
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