Question: My elderly mom, who is in a poor health, is thinking about signing her paid for home over to me. Is there any downside to it? – Becky N., Colorado Springs
Answer: As with any financial strategy there are pros and cons. It sounds as if your mom may be looking for peace of mind. There are potential pitfalls that could lead to a major headache if you don’t think this through properly.
Tax pitfalls to avoid
Gift. In the government’s eyes, adding your name to the title is considered to be a gift from your mom. Here is how Uncle Sam treats gifts.
In 2011, you can gift up to $13,000 per year to anyone and it’s no biggie. Once you go over the $13,000 threshold, you have to file a gift tax return. Since most likely your share of the home’s value is more than $13,000, your mom needs to file a gift tax return on Form 709. The tax return allows the IRS to keep track of your mom’s lifetime gifts. If she were to gift more than $5,000,000 (her life-time exemption in 2011), she would owe a federal gift tax. But unless your mom owns a “McMansion,” this should not apply to her.
You may lose out on valuable capital gain tax exclusion. The law states that you can sell your residence for up to $250,000 if single and $500,000 if married for a profit, and exclude that gain from taxes. But you would have to live in the home for two of the five years preceding the sale. So, if you (Becky) sell the home this year, you will not be able to exclude any gain from taxes.
No “step-up” in basis. You receive your mom’s cost basis when you become a part or sole owner of your mom’s house during her lifetime. Cost basis refers to the amount paid for the home, plus the cost of material improvements. If you inherited the home upon her demise, your basis in the property would be the home’s fair market value on the date of her death. Here is the difference between receiving the home as a gift today and inheriting it:
If she paid $50,000 for the home and made $10,000 worth of improvements, her basis or total investment is $60,000. If she gifts the ownership to you, you take over her basis in the property, which is $60,000. If you sell the house this year for $200,000, you would owe capital gain tax on the $140,000. None of the profit would be sheltered by the capital gain tax exclusion.
On the other hand, if you inherit the property when she dies, your basis would be “stepped up” to $200,000 or the fair market value on the day of her death. You would not owe capital gain taxes if you sold it right away.
Lawsuits can eat up your share
If you become a part owner of your mom’s home and get sued by a sibling or other heir claiming their share of the home, or get a divorce, you may be forced to sell the home.
Finally, and I am sure this does not apply to you, generally the parent is at the child’s mercy. If the son or daughter partners up with a money-grubbing spouse, who suddenly decides its time to get rid of the property, the parent can suddenly find herself on the street.
A simpler solution might be for your mom to have a will that leaves the house to you. But this can become a complicated issue, so your best bet is to consult an estate-planning attorney.
Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.
