Q:

Subject: Tax Question

 

If a sole surviving parent deeds his house to his child for one dollar before he passes away, doesn't that house represent a short term capital gain of some sort to the child for the market value of that home at the time of transfer in excess of the one dollar paid? No trust was involved, and the transfer was individual to individual.

 

If a tax is due, who pays it and when is it due? If the donor is required to pay, but can't because he transferred all his assets to that child, does the child pay? If not, who pays? I know of a situation like this where the donor did just that before checking into a VA retirement home and he is now broke. Did the child who was the recipient of the home for one dollar now get it without any tax consequences? If so, it seems like a loophole

 

Look forward to your response,

A:

The sale for one dollar was in actuality a gift of the house from the father to son.  This is tax free to the son and is required to be reported on a Gift Tax return (Form 709) by the father.  Unless the father had already used up his million dollar lifetime exclusion, there shouldn't be any actual gift tax required to be paid.

The next issue is the cost basis of the home to the son.  With gifts such as this, the father's cost basis transfers to the son.  If his wife had recently died, the cost basis will have been stepped up at the time of her death.  If they lived in a community property state, the entire cost basis was stepped up.  If they were in a non-community state, only the wife's half is stepped up and added to the father's cost for his half.

The only potential actual tax would come when the son sells the house, looking back to his cost basis.  Of course, if he lives in it for two years before selling it, he can exclude up to $250,000 of profit.

Any competent tax professional should be able to work with your client to make sure everything is being handled properly.  None of this is very complicated.

Kerry Kerstetter

Follow-Up Q:

Thanks Kerry!

I thought you could only gift up to $11,000 per year and any amount over that is a tax to the donor in that year.

A:

That $11,000 threshold is only for the requirement to file a Gift Tax return (Form 709).  For gifts over that during a calendar year, a 709 is required to be filed.  However, no tax is required to be paid if the donor chooses to use part or all of his million dollar lifetime tax free exclusion, which is available to everyone in addition to the $11,000 per year ($12,000 starting in 2006).

I have this all explained on my main website.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/04/2005 03:59:00 PM Send this post: