I am currently a student going to final year undergrad. She wants to buy a small house for me with her savings. I am not sure if I will quality for loan, so she may just buy it with her cash for me. She has been transferring $14k without declaring to my account but we understand that she has to file 709 to declare to IRS. 1) Wondering if her moving money to my account will cause any tax implications in future as well or affect her/me? 2) If I bought a house with her money and decide to rent it out, will I be subject to kiddie tax as that would be income from unearned money? 3) Is transferring cash from her account 2 months before my purchase a good idea? If not, what is the best way to do this without affecting her on me in any way. 4) Also, is there any limit on how much she can transfer to me for my house without causing any affect as long as it is within 5 million life time gift?
As an aside, a "small house" requires $300,000 just as a downpayment?
Thank you so much for looking into my question. The home will be in my name. Secondly, $300k was just an example, we will have to figure out the exact amount based on the cost of houses and location in California. 🙂
There shouldn't be much to be concerned about.
1) No, there won't be any tax implications for transferring money from her account to your account.. It is a Gift, not taxable income, so Kiddie Tax does not apply to that transfer.
2) Yes, if you are under age 24, rental income could be subject to Kiddie Tax. There are exceptions to that, such as if you provide over half of your income with earned income (from a job).
3) You can transfer the money anytime, it shouldn't really affect anything.
4) No, there isn't a limit. If her total lifetime Gifts and the value of her Estate when she dies is under $5.5 million (or more likely, $10+ million), there won't be any Gift Tax or Estate Tax.
The only possible think I can think of is if you are going to go to graduate school, having assets (money in the bank, a home, and/or a rental property), that could disqualify you from receiving financial aid. But if that isn't a problem, I don't see any other implications (other than your mom filling out the 709).
As a side note, starting in 2018 the annual Gift limit has increased to $15,000 per year without needing to file a Gift Tax return.
@TaxGuyBill Good point re financial aid. Also any income-based loan repayment plans.
Thank you very much for the detailed answer! Extremely helpful! Sorry that I have a follow up question: I am of age 21, so kiddie tax may apply. The only income I have so far is from my summer internships (total ~20k). I have 1 more year of school, so I can't start on a full time job until next June at the earliest if I find a job. So if I put all my summer internships income into the down payment, does it mean that I will not have to have kiddie tax on the rent? (I am not planning to go to graduate school and even if I do, I may not quality for financial aid, so I don't have that problem 🙂 ). Thanks so much again!
No, the down payment for the rental home won't avoid Kiddie Tax.
Look at the "support worksheet" to see if you pay for over 50% of your own support with EARNED income:
<a rel="nofollow" target="_blank" href="https://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf">https://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf</a>
However, even if you are subject to Kiddie Tax for 2018 (and possibly 2019), in my opinion you should not be overly worried about it. Due to depreciation, it is common for a rental property to show a LOSS, especially in the first year (I would be very surprised if it showed a profit in 2018). Even if it does have a profit, it is unlikely the profit will be very large (especially for the part-year in 2018). So with a small profit (or none at all), any "Kiddie Taxes" are unlikely to be large (especially for for the part-year and first year of 2018).
As a side note, are you going to receive a W-2 for your "internship"? In other words, is your employer withholding Social Security and Medicare taxes?
If they are NOT, then it could be questionable if the IRS will consider that as "Earned" income (it partially depends on the exact circumstances of the contract for the Internship).
Thanks a lot! Sorry that I am still understanding. So for example, if I bought a house in 2018 with my mom's money + my summer internships income so far as cash without loan, and rent it out for $1000 at month. So, I am assuming that I will have to pay kiddie tax (rate of my mother's tax bracket) for the $1000 * number of months I have rented it for. Next, if I find a job in June 2019, will I continue to be subject to kiddie tax forever because I have bought that house with my mom's money?
No.
If you rent it out for $1000 per month, you will have expenses. Real estate taxes, insurance, repairs/maintenance, depreciation, and possibly advertising and utilities. So let's say you make a PROFIT of $200 per month (again, it is likely your first year will show a loss). That $200 is what is taxed and subject to the Kiddie Tax rate (the 2018 rules change Kiddie Tax to being taxed at Trust rates, not your parent's tax rate).
Let's say in 2019 you have met the criteria of paying for your support with Earned Income. Then Kiddie Tax does not apply in 2019. What happened in 2018 would not affect if you are subject to Kiddie Tax in 2019.
Again, look at the support worksheet. "Support" means paying for you own housing, food, etc.. It does not matter what funds you used to purchase a rental home; that will not affect the support at all.
yes, I am truly grateful for the answers which were very helpful!
Also, 1 more question: My mom is transferring the money from her account to me. They have separate accounts. When she fills 709, does my dad need to fill in to consent as well? They are married, living in California, though my dad is abroad at this time to take care of some business. Hence my question. Thanks again.