01 Aug When giving a home as a gift, why planning matters
Q. My mother-in-law is giving her house to her son, who is disabled and lives at home. How will his cost basis and capital gains be determined? His only is Social Security Disability of about $18,000 per year.
A. Deciding whether to give a home as a gift goes beyond cost basis and capital gains, but let’s start with basis.
Generally, a donor’s basis in the home is the amount paid by the donor at purchase, plus the cost of improvements made by the donor, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
Upon receiving the home as a gift, the donee’s basis is generally the donor’s basis, she said.
“There are special rules if the fair market value of the home is less than the donor’s basis at the time of the gift,” Romania said. “When the donee desires to sell the property, the donee’s original basis is increased by the cost of improvements made by the donee.”
The Internal Revenue Service has issued Publication 523 to assist taxpayers with figuring gain on the sale of a residence.
Next, capital gains.
A single person is eligible for a $250,000 exclusion from capital gain on the sale of a personal residence if he or she has owned the residence for two out of the last five years and lived in the home for two out of the last five years prior to sale, she said. But a shorter time period – one year out of the last five years – is permitted for individuals who were unable to care for themselves and required nursing home or other care facility services.
Generally, Romania said, if the gain exceeds the exclusion, the net capital gain is taxed at zero percent for taxpayers in the 10 to 12 percent ordinary income tax brackets, 15 percent for taxpayers in the 22 to 35 percent tax brackets and 20 percent for taxpayers in the 37 percent bracket.
“Although income tax does not appear to be an issue here, if the son’s mother retained at least a life estate in the home until her death, it would allow the home to receive a step-up in basis to the date of death value on mother’s death thus eliminating much of the potential income tax gain provided son waited to sell it until after his mother’s death,” Romania said.
That’s why it’s important to consider whether a gift now is the right move.
But before son receives this gift, they should consult with an estate planning and/or elder care attorney. Depending on the disability and assistance anticipated, there may be better ways for son to receive this house from his mother than outright in his name as a gift from his mother, such as in a trust for his benefit, she said.
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This story was originally published on August 1, 2019.
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