Do I have to pay taxes on a home that was deeded to me?

Sooner2000 asked...

My aunt deeded her house to my wife and I instead of putting it in her will. The paperwork states that this is in lieu of care provided to her as if I were a son or a daughter. She is in her 90's and will reside with us in the home she deeded us until she dies. Will we have to pay taxes on this home before or after her passing?

Expert Answer

Liza Hanks is the founder and owner of FamilyWorks Estate Planning, a law firm with offices in Campbell and Los Altos, California, and the author of The Busy Family's Guide to Estate Planning (Nolo, 2007).

There are three different taxes to consider.

1. Gift tax. Your aunt's transfer of the home to you and your wife is considered a taxable gift in the year that it was transferred. Your aunt will need to file a 709 Gift Tax Return by April 15th of the next year.

However, because your aunt, like all of us, has a gift tax credit equal to the tax on the transfer of $1,000,000, she won't owe any tax on this gift, as long as the fair market value on the house is less than $1,000,000 and she hasn't made any other taxable gifts during her lifetime.

Instead, she'll need to report it on the 709 gift tax return, and she will simply use up the credit for the tax that would otherwise be owed. Think of the credit like a card at Starbucks: If you buy a card for $30, and then buy a few coffees, you'll have used up some of that credit on the card, and the remaining balance will be what's left.

2. Income tax.
You and your wife won't be subject to income tax on the value of the gift. Gifts are not considered ordinary income in the tax code.
To clarify, the gift tax falls on the person who gives the gift, not the people who receive it.

3. Property tax. You will need to check with the assessor in your county to see what the property tax issues are going to be. You and your wife would be considered new owners under the rules in some locales, and would be subject to a reassessment of the tax based on its current value.