Gift a House

[sandy4042]

Yowza, big difference.  This illustrates YMMV very well when deciding whether to Quit Claim Deed or not.  My house I bought thirty years ago for $180,000; it'd sell for $450,000 now, still within the range of $500,000 capital gain exclusion for a married couple.  There are a couple houses on my street where the adult children with their kids are now the occupants of the houses they grew up in;  the public school a block a way is excellent.

[Carl]

Now you see why it's not a good idea for an aging parent to gift their property to their children. It's better to let them inherit it so they get the step-up in the cost basis. I know my parents purchased there house in 1058 for a whopping $3,800 (2BR/1BA at the time).  Added on around 1966 at a cost of $12,000 and added on again in 1972 at a cost of $17,000. The house is now 4BR/2BA now, and having replaced the roof 3 times so far since they owned it, it has a cost basis of around $42,800 give or take. Parent's wanted to gift it to us kids last year, but I talked them out of it once they understood the tax consequences. The house was appraised just over a year ago at $320,000. Definitely don't want it gifted to us. We'll happily wait to inherit it, and the longer the wait, the better as far as I'm concerned. I'm in no hurry to lose my parents. But with them both in the 80's, it could happen any time really.

[sandy4042]

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@tagteam wrote:

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@Carl wrote:

When gifting real estate, the value of the gift given is basically what the giver originally paid for it, plus the cost of any property improvements paid for by the giver.

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That would be the basis of the gift in the hands of the donee, not the value of the gift.

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That makes sense.  I took a quick look at the Form 709, and it does ask for both values, the FMV appraised value (which I assume is the value of the gift that is subtracted from the giver's lifetime exclusion) and what the giver paid for it, plus improvements, i.e., cost basis to be passed on to the recipient.  I wonder if/when the gift recipient ever sells the house, the IRS has the 709 reported cost basis in its database to compare when the sale is reported.

[sandy4042]

I don't see any reason for them to gift it to you, they're still living there and are happy.  Before Medicaid tightened the rules and came up with a look-back period, I think elderly parents and their families were trying to reduce their assets down so they could qualify for Medicaid nursing home coverage.  I hope your parents live a good long time, and they stay in their home as long as they can.  I've not been a happy camper with the assisted living route experience for my parent.

[tagteam]

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@sandy4042 wrote:
I wonder if/when the gift recipient ever sells the house, the IRS has the 709 reported cost basis in its database to compare when the sale is reported.

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Doubtful there would be any matching for a sale of the property by the donee.

However, they retain those forms (709) just about forever so they absolutely would pull it out after the donor (who filed the 709) passes away and is required to file a 706. That latter requirement leaves out a ton of taxpayers, but that is the rationale behind reporting gifts exceeding the annual exclusion (as well as to collect gift tax for extremely large gifts).

[jumicircle]

I think I have the perfect answer to this problem/dilemma.  Place the property into a trust with you as beneficiary.  It is a very simple process and will solve the "gift" issue entirely.

[tagteam]

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@jumicircle wrote:

I think I have the perfect answer to this problem/dilemma.  Place the property into a trust with you as beneficiary.  It is a very simple process and will solve the "gift" issue entirely.

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Sorry, that will not work. If the trust is a typical revocable trust, as soon as the property is placed into the trust it is considered to be a gift to the beneficiary(ies) (assuming the beneficiary is not also the grantor).

An IDGT would probably work, but that is generally reserved for investment assets (such as securities) and there are other issues that will arise as well.

[sandy4042]

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@tagteam wrote:

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@jumicircle wrote:

I think I have the perfect answer to this problem/dilemma.  Place the property into a trust with you as beneficiary.  It is a very simple process and will solve the "gift" issue entirely.

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Sorry, that will not work. If the trust is a typical revocable trust, as soon as the property is placed into the trust it is considered to be a gift to the beneficiary(ies) (assuming the beneficiary is not also the grantor).

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@tagteam Are you absolutely sure that putting your house into a revocable trust is considered a gift?  My reading seems to imply it is not, because you still are in control of the trust while you are living (i.e., it is revocable) so it can't be a gift.  When you die, the trust becomes irrevocable, and the house gets a step-up basis.  One of the main reasons people put their assets into a revocable trust is so the heirs can avoid the  probate process.  My acquaintance who has farm land that her mother had in trust now has to deal with what to do  with it; she is now the successor trustee and a beneficiary.  One of the other beneficiaries wants it split and out of the trust, which is when most recently I heard the term "quit claim deed".

[tagteam]

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@sandy4042 wrote:
@tagteam Are you absolutely sure that putting your house into a revocable trust is considered a gift?

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Yes, I am absolutely sure, assuming the beneficiary is not also the grantor.

[You even quoted that part of my previous post]

[tagteam]

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@sandy4042 wrote:
When you die, the trust becomes irrevocable, and the house gets a step-up basis.  

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That is absolutely correct, if the house is included in the grantor's estate (which it would be in a standard revocable trust (i.e., a grantor trust).

[sandy4042]

Terminology hang-up here.  So the person setting up the revocable trust for themselves as estate planning (most cases, I'd assume) is both the grantor and the beneficiary?

 ETA: OK, re-read what you said.  The grantor IS NOT the beneficiary in your typical trust.

[tagteam]

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@sandy4042 wrote:

 ETA: OK, re-read what you said.  The grantor IS NOT the beneficiary in your typical trust.

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In the typical revocable trust, the grantor is the beneficiary (at least initially).

Regardless, another way around this issue is a transfer on death deed (TOD, which most states allow) or a Lady Bird deed, which circumvents probate and preserves the step up in basis.