Transfer ownership without tax bite?

Feds likely to frown upon buyer's crafty plan

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jan. 3, 2011

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Feds likely to frown upon buyer's crafty plan

Benny Kass
Inman News™

DEAR BENNY: If I buy a house outright for my aunt for $459,900 (fair market value), what is the best way for me to transfer ownership to her without tax consequences? I know that the gift tax exclusion is now $13,000. I'm not married and neither is my aunt.

I understand that you would probably recommend I have her sign 35 promissory notes of $13,000 each plus one for $4,900. Then just forgive each note annually for 36 years. However, I'd rather not drag it on for that long, if possible. I was thinking of doing it indirectly through 35 trustworthy people, like giving each of them a $13,000 share of the property that they can just regift to my aunt.

Would the best way be: (1) having 35 people sign promissory notes that I can immediately forgive, then having her sign a promissory note to each person that they can immediately forgive, or (2) somehow signing over a $13,000 share of the property to each person that they can just re-gift to my aunt? Do you have a better suggestion? --Ashley

DEAR ASHLEY: I do not provide specific legal advice to my readers; I can give only general information and always urge my readers to consult with their own tax and legal advisers. You certainly are creative, but I suspect that the Internal Revenue Service (and possibly your state government) will consider this a scam designed to avoid either capital gains tax or gift tax, or both.

First, even if would fly legally, I cannot believe you can find 35 people who would be willing to stick their respective necks out for your scheme. And if you sign over any portion of your property, I suspect that you will have to pay a lot of recordation and transfer taxes to your local taxing authority.

Have you considered having your aunt buy the property with your guarantee to the lender? That's one possible scenario. Another is to see if you can add your aunt to title, even though you will be the only person signing the promissory note to your lender.

Alternatively, can you afford to lend your aunt the money so that she can buy the house in her own name? She can sign a promissory note, secured by a deed of trust (called a mortgage in some areas), and you will be the lender.

Then you can gift her a portion of the property each year based on a percentage that does not exceed $13,000. And to avoid the situation where this has to go on for years, you can also include her as the beneficiary of your last will and testament.

I welcome other suggestions from my readers.

DEAR BENNY: We heard that it's a good idea to add your adult child to your deed so that at your death there will not be inheritance taxes/death taxes, etc. Can you discuss the pros and cons of adding our 18-year-old daughter to the deed to our house, including current tax implications as well as any upon our deaths? We still owe around $75,000 on the house. Would we have to add her as a responsible party on the mortgage as well? --Sandra

DEAR SANDRA: This is a very personal issue that only you and your husband can answer. However, I don't think it's a good idea for two important reasons.

First, you could be creating a tax problem for your daughter if she ever sells the home. This is somewhat complicated, but if you add your child to title, her tax basis is your basis. In general, tax basis is the amount you paid when you bought your house, plus any improvements that add value to your house.

Let's say you bought the house for $100,000 and made no improvements. Your tax basis is $100,000, or $50,000 for you and the same for your husband. Let's further assume that when your husband dies, the house is worth $200,000.

Although the stepped-up basis was repealed for year 2010, the new tax law that President Obama signed on Dec. 17, 2010, restores that concept beginning Jan. 1, 2011.

So, when your husband dies, you get the stepped-up basis. Your basis now becomes $150,000 (your original $50,000 plus your husband's basis on the date of death).

Let's further assume that when you die, the house is worth $400,000. Your daughter will now inherit the house, and her tax basis is the value of the property on the date of death, namely the $400,000. If she decides to sell at that price, she will have had no gain and thus will not have to pay any capital gains tax.

But if you add your daughter to title, the IRS will treat it as a gift. Let's say you give her one-third of the house. You and your husband are still alive. Accordingly, her basis becomes $33,333 (i.e., one-third of your collective basis).

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