How Do I Gift My House?

Rich's mother passed away recently, and he's in the process of selling her house. His daughter plans to purchase the house. What's the best way to make the sale when it comes to tax implications?

QUESTION: Rich in New York City says his mother passed away recently, and he’s in the process of selling her $500,000 house. His grown daughter plans to purchase the house from Rich and his two sisters. What’s the best way to make the sale when it comes to tax implications?

ANSWER: You will not have any income taxes on the sale of the house, nor will your sisters, because the basis upon death is the market value at the time of death, and that’s what you’re selling it for. There won’t be any gain for income tax purposes for your sisters.

In your case, what you are doing is giving your daughter a gift of $180,000 or so. You will get into gift tax if you’re not really careful in how you do that. I would tell you to go to a tax professional and/or an estate planning attorney. There are two ways to get at this.

The first way, which is the easiest, would be to use some of your federal estate tax exemption, which you can do for up to $1 million to avoid gift tax. That means you are giving up some of your estate that is exempt. But as long as your estate isn’t over $5 million, that’s not a big deal.

You want to elect the unified estate tax credit. That helps you avoid gift tax. You can give gifts away in excess of $13,000, individual to individual, and not have a gift tax on it. That’s the easiest way, but you have to be very specific because you have received the inheritance and you are now giving that inheritance to an individual, not a nonprofit.

You are going to get gift taxed if you do that without doing something. The gift tax in this case could be about $90,000, so you want to address this.

The second way to do this is that you can give $13,000 to an individual every year. You can give your daughter that much, and her husband $13,000, and each of her kids $13,000 each year. You can do that this year and again on January 1. That starts to move some of the money, and you can take a note back against the house that is forgiven for $13,000 a year on each of these people. You can work it out that way without being taxed on it as well. But that’s a lot of complication, and I really wouldn’t use that method.

See your estate planning attorney or a good tax professional or a certified public accountant who can walk you through that. But be sure to do that before you do the transaction. Otherwise you’ll get yourself into a heap of trouble.