Father wants to deed his second home to my brother and I. Are we liable for a gift tax?

A fellow caregiver asked...

My father who is 76 and in good health has 2 homes in Montana. One was puchased when he and my stepmother were not getting along and on their way to divorce. However she passed away before the divorce was done and he ended up with two homes.

The house has been on the market for a while and he wants to deed it to my brother and I now, verses trying to continue to sell it or wait until he passes to leave it to us.

there are upkeep and annual property taxes he would like to get out of and my brother and I could pay the taxes and at the same time list the home for sale.

However, would I be liable for a gift tax before the house is sold?

I understand that we would be taxed at the profit from the cost of the home when my father built and what we sold it for verses the appraised value at the time of dad's passing.

Is there any way to get around that or lessen the Capital gains taxes.

Expert Answer

If your father gives you (and your brother) a home he owns while he is alive, you are not liable for gift tax. It is the GIVER, not the receiver, who can be liable for gift tax. Under current U.S. tax rules, a person can give away up to $14,000 per year per person free of gift tax. Because a house anywhere in the U.S. will be worth more than $28,000 (the combined total your father can give you and your brother in one year), gift-tax would be assessed against the gift of the house.

However, any gift-tax assessed would be deducted from your father's combined estate/gift tax personal exemption. That federal exemption for 2013 is for property worth less, in total, than $5,250,000. So it is highly unlikely that your father wold actually have to pay out any money to pay for the gift tax assessed.

The capital gains tax issue is more complicated. If your father gives the house to you, you acquire it at his "basis," for tax purposes. Basis is essentially his purchase price, plus the cost of any improvements. If you and your brother were to sell the house, your capital gain would be the sale price minus the basis.

By contrast, inherited property receives what is called a "stepped-up" basis, to its market value as of the date of the owner's death. If you and your brother inherit the house and then sell it, your capital gain would be the sales price minus the stepped-up basis.

With real estate that has been owned for a long time and has substantially increased in value, you can probably save a bundle on any future sale if you inherit the house, rather than receive it now as a gift.

One possibility: You and your brother agree with your father that you will pay the costs for upkeep and annual property taxes"”which you'd have to do anyway if he gave you the house. Then he leaves you the housed when he dies, and you and your brother get the benefit of the stepped-up basis.