Tuesday
Oct022012
Gifting of Real Estate and Quick Claims
Brian Donlyuk - Vista Filare Specialist
This excerpt is from Duan Gomer's curriculim for real estate agents. It describes exactly what I have encountered time and again as a REALTOR when speaking to my clients:
My teaching experience has taught me that most taxpayers don't understand the problems and possible penalties of gifting real estate that has been held by one party for a long period of time. Normally, when property is gifted, there is one phrase that you should recite, "Basis follows a gift."
Let's assume that a widowed mother is ill in the hospital. She owns a home that she bought many years ago for $30,000 and over the years, the basis has grown to $350,000. Fair market value is a legitimate $700,000. She doesn't have many other assets. There are two children and she intends to leave all of her assets to them.
If the children receive the property after her death, the basis of the property is the fair market value at the time of her death or the later alternate valuation date if one is used for estate tax purposes. If the children receive the property and sell it the next day for a net price of $200,000, there is no income tax to be paid. This great benefit is called "Full Step-up of Basis".
However, if one child convinces the mother to "gift" them the property before she dies, the basis for the children would be $350,000. When they sell the property soon after for a $700,000 net price, they would have to pay a capital gains tax on $350,000. All because they couldn't wait.
This problem arises whenever a person "gifts" a property to someone, and the basis is much lower than the Fair Market Value. If I bought a home and then gifted it to someone immediately, their basis would be the same as mine. Since I just purchased the property, there is no difference between Basis and Fair Market Value.
Get tax advice on how you should hold title and how a survivor should react later. Wills, trusts, health care directives, final intention, etc. should all be evaluated. So many people are always a day late and a dollar short. You don't have to pay an arm or a leg for these services but if you don't do them, remember, "Those who dance must pay the fiddler."
Pasted from <http://exams.duanegomer.net/new/swc3a.asp>
My teaching experience has taught me that most taxpayers don't understand the problems and possible penalties of gifting real estate that has been held by one party for a long period of time. Normally, when property is gifted, there is one phrase that you should recite, "Basis follows a gift."
Let's assume that a widowed mother is ill in the hospital. She owns a home that she bought many years ago for $30,000 and over the years, the basis has grown to $350,000. Fair market value is a legitimate $700,000. She doesn't have many other assets. There are two children and she intends to leave all of her assets to them.
If the children receive the property after her death, the basis of the property is the fair market value at the time of her death or the later alternate valuation date if one is used for estate tax purposes. If the children receive the property and sell it the next day for a net price of $200,000, there is no income tax to be paid. This great benefit is called "Full Step-up of Basis".
However, if one child convinces the mother to "gift" them the property before she dies, the basis for the children would be $350,000. When they sell the property soon after for a $700,000 net price, they would have to pay a capital gains tax on $350,000. All because they couldn't wait.
This problem arises whenever a person "gifts" a property to someone, and the basis is much lower than the Fair Market Value. If I bought a home and then gifted it to someone immediately, their basis would be the same as mine. Since I just purchased the property, there is no difference between Basis and Fair Market Value.
Get tax advice on how you should hold title and how a survivor should react later. Wills, trusts, health care directives, final intention, etc. should all be evaluated. So many people are always a day late and a dollar short. You don't have to pay an arm or a leg for these services but if you don't do them, remember, "Those who dance must pay the fiddler."
Pasted from <http://exams.duanegomer.net/new/swc3a.asp>
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