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Gift and estate taxes are one of the most difficult areas of the tax law to understand; and for that reason cause some of the biggest confusion among taxpayers.

Let's begin with the easiest part.  You are correct that for the 2016 and 2017 tax years, $14,000 is the most that any one person can "gift" to another, in the form of cash or property, without incurring the necessity of filing a gift tax return (more on that below).

However, each person can "gift" that $14,000 amount to any number of individuals; so your grandmother could gift $14,000 of home equity to you, and $14,000 to each of your two children, gift-tax free.  That would total $14,000 x 3 = $52,000 for, say, 2017.  Next year, your grandmother could do the same, for another $52,000 in equity. But it would also make your children legal co-owners of the house . . . and you'd need to hire a lawyer to draft the paperwork to make it effective, which gets fairly messy for legal and tax purposes quite quickly.  We would strongly suggest avoiding that kind of entanglement.

To be clear, the $14,000 gift-tax free amount (for you) doesn't increase by family size:  a bigger family just provides for individuals who are eligible to receive tax-free gifts.

Now then, just because someone receives over $14,000 in a gift in a given year, doesn't mean that they owe any taxes.  In fact, if any taxes were owed on the gift, they would have to be paid by the gift GIVER, not the gift RECEIVER.  Even then, under the current tax code, every individual has a lifetime amount of gift money / property that then can give away, without paying taxes on it.  Currently, this amount is $5,490,000 for 2017.  That's nearly $5.5 million dollars !!!

But, even where such a large gift-tax free cap exists, there is a legal requirement to file what is known as a gift tax return (IRS Form 709), whenever the gift amount in a year exceeds $14,000 to any individual.  Thus, the Form 709 tax return may result in no taxes being due (where the lifetime gifts made to date are under $5,490,000), but the specialized tax return must still be filed with the IRS.

Gift tax returns, Form 709, are not supported by TurboTax.  Form 709 does not exist in our software package, although you can view a blank copy at the following IRS.gov webpage:

https://www.irs.gov/pub/irs-pdf/f709.pdf


Given your self-described situation, then, this is the course of action we would recommend.  Pay your grandmother the amount that you mutually agree upon:  $60,000.  The difference between $150,000 (market value) and the $60,000 you pay her is $90,000.  You can automatically reduce that gift by $14,000, which is the yearly gift exclusion amount.  That leaves $90,000 - $14,000 = $76,000 in home equity that is a (reportable) gift to you, in the year of the transaction.

Next, find a local CPA or a lawyer experienced with Form 709 (the gift tax return) and have it completed with the full cooperation and consent of your grandmother (she's the one who is legally required to file it as the gift GIVER, not you, the gift RECEIVER).  Your grandmother will almost certainly be beneath the $5,490,000 lifetime cap, and so her only cost will be the actual preparation fee charged by your chosen tax professional, plus postage to the IRS.  A gift tax return is not required to be filed in any state we know of, outside Connecticut, so there should be no corresponding state tax return required.

Finally, you and she should record the change in home ownership (i.e., the deed) with your local county property recorder's office.  You might be able to do this yourself, or you might need the assistance of a local realtor, real estate professional, or attorney.

But that is how to accomplish what it sounds like you and your grandmother want to do, and to do it legally.

For additional information on gift and estate taxes, you can also consult this IRS.gov webpage:

https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes


Thank you for asking this important question.

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