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New Member
posted Jun 4, 2019 11:54:12 AM

My mother wants to give me her house that she still owes,but it's way less than market value is their a hair tax or how does this work

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1 Best answer
Level 15
Jun 4, 2019 11:54:14 AM

The mortgage balance is   meaningless, for tax purposes.

The cost basis in a gift is the giver's basis. Your cost basis in the house will be what your mother paid for it*. So, when you sell the house, your taxable capital gain will be the difference between what you sell it for and your cost basis**.

*You would  add any improvements, you mother made over the years, to the cost basis. If you father is deceased and previously owned the home with your mother, there is another cost basis adjustment that is made for when the titled transferred  solely to her.

**The usual rule, for a gift, is that the recipient's basis is the giver's basis (what you mother paid for it). But there is an exception for the gift of her home, where she retained the right to live there ("life estate"). (seehttp://www.njelderlawestateplanning.com/2010/02/articles/estate-and-inheritance-tax/life-estates-estate-tax-and-inheritance-tax-consequences/ which states in part "If you give away an asset and keep a life estate in that asset..... the cost basis of the house is "stepped-up" to the value of the house on date of death [IRC 2036]")

The difference between the current value of the  house and her cost basis is a gift of equity. If the total value of the gift (basis + equity) is more than $14,000, you mother (not you) will need to file a gift tax return (a separate filing from income tax).  "Gift Tax" is somewhat of a misnomer.  Even though a gift tax return may be required, very few people ever actually pay federal gift tax. The purpose of the gift tax return is usually only to document a reduction in the allowable estate tax exemption.
See https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/INF12127.html

8 Replies
Level 15
Jun 4, 2019 11:54:14 AM

The mortgage balance is   meaningless, for tax purposes.

The cost basis in a gift is the giver's basis. Your cost basis in the house will be what your mother paid for it*. So, when you sell the house, your taxable capital gain will be the difference between what you sell it for and your cost basis**.

*You would  add any improvements, you mother made over the years, to the cost basis. If you father is deceased and previously owned the home with your mother, there is another cost basis adjustment that is made for when the titled transferred  solely to her.

**The usual rule, for a gift, is that the recipient's basis is the giver's basis (what you mother paid for it). But there is an exception for the gift of her home, where she retained the right to live there ("life estate"). (seehttp://www.njelderlawestateplanning.com/2010/02/articles/estate-and-inheritance-tax/life-estates-estate-tax-and-inheritance-tax-consequences/ which states in part "If you give away an asset and keep a life estate in that asset..... the cost basis of the house is "stepped-up" to the value of the house on date of death [IRC 2036]")

The difference between the current value of the  house and her cost basis is a gift of equity. If the total value of the gift (basis + equity) is more than $14,000, you mother (not you) will need to file a gift tax return (a separate filing from income tax).  "Gift Tax" is somewhat of a misnomer.  Even though a gift tax return may be required, very few people ever actually pay federal gift tax. The purpose of the gift tax return is usually only to document a reduction in the allowable estate tax exemption.
See https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/INF12127.html

New Member
Jun 4, 2019 11:54:15 AM

Ok thanks so I wouldn't need to pay taxes of difference of fair market and what I purchase it for

Level 15
Jun 4, 2019 11:54:16 AM

Are you buying it or is she giving it to you as a gift?  Either way you report it when you sell it.  If she is selling it to you she needs to report the sale or might have to file a gift tax return.

Level 15
Jun 4, 2019 11:54:18 AM

One word of caution--you did not say why your mom wants to gift the house to you.  Just in case it is because she is getting older and suspects she may need Medicaid & nursing home care in the future, be aware that there is a five year lookback at any assets she disposes of.

Level 15
Jun 4, 2019 11:54:19 AM

And actually you should wait to inherit it.  If it is a gift then your cost is what she paid for it and you don't get a step up in value.

New Member
Jun 4, 2019 11:54:21 AM

Ok thanks she owes 60,000 and purchased originally for 125,000 and appraised for 300,000 so I would only pay taxes on originally purchase price?

Level 15
Jun 4, 2019 11:54:22 AM

If your mother gives you her house and then you sell it; you will have to report a long term capital gain (LTCG)* of $175,000 (300K - 125K = 175K). Depending on how much total income you have LTCG are partially taxed at 0%, 15%, 20% and/or 23.8%.
If your mother sells the home, herself, there is no tax. Taxpayers may exclude up to $250,000 of gain on the sale of their principal residence if certain rules are met.

*It's considered a long term gain, because your mother's holding period transfers to you with the gift.

New Member
Jun 4, 2019 11:54:23 AM

Thank you very much