For a disabled child who depends upon Social Security Disability for income—about $18,000 a year—a mother’s gift of the family home is generous and kind. However, there are tax considerations that must be planned for, so as not to put his ownership at risk.
nj.com’s recent article, “When giving a home as a gift, why planning matters” asks how will his cost basis and capital gains be determined?
A donor’s basis in the home is typically the amount paid by the donor at purchase, plus the cost of improvements made by the donor. When the son or donee receives the home as a gift, his basis is the donor’s basis.
However, there are some special rules, if the fair market value of the home is less than the donor’s basis at the time of the gift. When the donee wants to sell the property, his original basis is upped by the cost of improvements made by the donee.
A single person can receive a $250,000 exclusion from capital gain on the sale of a personal residence, if she’s owned the residence for two out of the last five years and lived in the home for two out of the last five years prior to sale.
However, a shorter time period— one year out of the last five years—is allowed for individuals who were unable to care for themselves and need nursing home or other care facility services.
If the gain is more than the exclusion, the net capital gain is taxed at 0% for taxpayers in the 10-12% ordinary income tax brackets; at 15% for those in the 22-35% tax brackets, and 20% for taxpayers in the 37% bracket.
While income tax does not appear to be an issue in this scenario, if the son’s mother retained at least a life estate in the home until her death, it would allow the home to receive a step-up in basis to the date of death value on the mother’s death. That would eliminate the majority of the potential income tax gain, provided the son delayed selling it until after his mother’s death.
That’s why it’s important to consider whether a gift now is the right move.
The family would be wise to speak with an elder law estate planning attorney before making any gifts. If the ownership of the home disqualifies the son for government benefits, the gift could have disastrous results. It may be better for the house to be placed in a trust, for instance, with another family member serving as the trustee. The attorney will be able to help the family determine the best way to transfer the ownership of the house from the mother for the son’s use.
Reference: nj.com (August 1, 2019) “When giving a home as a gift, why planning matters”