I am buying a condo for my son (cash purchase), in his name, to be close to College. Are there any tax implications that should be considered?

[tagteam · Accepted solution]

There are gift tax implications in the sense that you will probably need to file a gift tax return (Form 709) for the 2022 tax year.

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

[NCperson]

@bk591 note the form doesn't create a requirement to pay taxes, but it does result in the reduction of the estate exemption at the end of life.  For most even that won't matter, unless your estate is otherwise large enough to be required to pay estate tax. 

[Bsch4477]

A few thoughts 

1.  You are gifting an account more than the annual exclusion ($16,000) so you will have to report that on form 709. 

2. Assuming you are in a higher tax bracket than your son and if you itemize on your tax return, would it benefit you if you owned the home in order to take the associated tax benefits?

[bk591]

Would I or my child (son) be liable for any kind of tax, gift tax or another type of tax? To be clear, the property (condo) is worth $247,000 and I am paying cash for it. All $247,000 is my after-tax income, saved over many years. My annual income is approximately $170,000.

[Opus 17]

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@bk591 wrote:

Would I or my child (son) be liable for any kind of tax, gift tax or another type of tax? To be clear, the property (condo) is worth $247,000 and I am paying cash for it. All $247,000 is my after-tax income, saved over many years. My annual income is approximately $170,000.

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Gifts of more than $16,000 must be reported, but gift tax is only owed if the giver's lifetime gifts is more than about $11 million.  (The gift must be reported so the IRS can track it against your lifetime limit.) If gift tax was owed, it is owed by the giver, never the recipient.

If the home is purchased with cash, there is no mortgage interest to deduct.  To deduct the property tax, the taxpayer must be an owner of the property against whom the tax is obligated, must actually pay the tax, and must itemize deductions on their tax return.  I suspect that either you will be paying the tax, or your son will but he won't have enough other income and deductions to itemize, so likely no one can itemize the property tax.

Some of your closing costs are not tax deductible but are allowed as adjustments to the cost basis.  If your son owns the home and lives in it as his main home for at least two years, he probably won't pay capital gains tax anyway, when college is over. However, you may want to keep track of those closing costs in case you need to know the cost basis of the home.  See page 8 of IRS publication 523.

https://www.irs.gov/forms-pubs/about-publication-523

I can think of very little reason to give the home to your son, instead of owning it and allowing him to live there, except for the capital gains exclusion.  There is some risk to giving him the home, teenagers are not known for being incredibly responsible (boy's brains don't finish maturing until about age 25).  Buying a home for a child is not quite the same thing as giving him the keys to a high powered car, but it's not risk-free either.  

[NCperson]

@bk591 

there is no gift tax to be paid either now or in the future, unless your estate is over around $12 million ( @Opus 17 says 'around $11mm but the number increases with inflation and is technically $12.06mm this year), so we are both "in the ball park". 

You can think of what is occuring like this: your son is inheriting some of your estate while you are still alive.  So while you can currently have an estate of $12mm and there is no inheritance tax, in this case, since you are giving your son $250,000 now,  you can have an estate of $11.75mm and there is no inheritance tax. you estate has simply advanced some of the asssets now instead of later.

THe IRS requires you to report this gift of $247,000 (less the $16,000 annual gift that does not require reporting).  It's just reporting - in case your estate is large upon death - for most it's not that large!.  There is no tax for you to pay nor is there tax for your son to pay.  It is just reporting against a future event.