Home Sale Gain Exclusion from gifted property

[simonhd11]

Hello,

I was wondering if I were to be gifted a property by my parents, there is no tax imposed on my parents or myself but instead it gets deducted from my $11.7 Estate tax exemption correct?

If so, could I still qualify for the home sale exclusion for a property that was gifted to me as long as I live there for 2 of the last 5 years?

For example:

2022: My parents gift be a $500k property

2025: After living there for 3 years, I sell the house for $700k. Is the $200k gain all tax free?

Thank you!

[tagteam]

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@simonhd11 wrote:

I was wondering if I were to be gifted a property by my parents, there is no tax imposed on my parents or myself but instead it gets deducted from my $11.7 Estate tax exemption correct?

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Your parents, as donors, would likely be required to file a Form 709 (gift tax return) and the amount that exceeds the annual exclusion would be deducted from their lifetime exemption (thanks to Mike9241 for the clarification).

See https://www.irs.gov/instructions/i709#en_US_2021_publink16784xd0e314

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@simonhd11 wrote:

If so, could I still qualify for the home sale exclusion for a property that was gifted to me as long as I live there for 2 of the last 5 years?

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That is correct. However, assuming the fair market value at the time of the gift was greater than your parents' adjusted basis, you would take their adjusted basis in the property (which may be rather low if they have owned the property for a number of years) to figure a gain. 

See https://www.irs.gov/publications/p523#en_US_2020_publink10008938

[Mike9241]

 but instead it gets deducted from my $11.7 Estate tax exemption correct?

wrong. if they're making the gift to the extent the gift exceeds the gift tax exclusion  it will reduce their lifetime exemption

[Opus 17]

1. The lifetime exemption for gifts and estates is on the giver, not the recipient. 

2. Your basis is NOT the value of the property.  Your basis is your parent's adjusted cost basis.  In general, that will be what your parents paid for the property, plus the cost of any permanent improvements, minus any deductions for depreciation (for business or rental use) or casualty losses. 

Then you can further adjust your basis if you pay for improvements while living in and owning the property.  

Be diligent in documenting your parents' basis, sooner rather than later, and keep all those documents in a safe place for as long as you own the home plus 4 years after you sell.  When you sell, and if you are audited, the IRS does not have to give you credit for any basis or adjustments you can't prove.

3. If your parents are giving away the home as a form of estate or tax planning (to "avoid probate"), especially if they have chronic illnesses, you should see a proper estate planner before making the gift.  There are some traps they can easily fall into without proper advice.  

[simonhd11]

I see. But if my parents buy the property in 2021 for $500k and then gift it to me right away then I have a basis of $500k for that property correct?

[Opus 17]

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@simonhd11 wrote:

I see. But if my parents buy the property in 2021 for $500k and then gift it to me right away then I have a basis of $500k for that property correct?

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Correct.  (If you read page 8 of publication 523, linked to above, you will find that a few of the closing costs can be added to the cost basis.)