RosieQParticipantStatus: PhysicianPosts: 173Joined: 06/03/2017
My mother in law has a variety of real estate holdings. She has 3 daughters all in their 20s or 30s, getting settled etc. We were visiting this last weekend and she expressed a desire to sell one of her single family homes in California which has about 650k in equity, providing around 200k to each of her daughters (one of whom is my wife). This could be used as a down payment etc. However she is hesitant about the home sale due to gift taxes and trying optimize the transaction.
I’m a little confused about the difference between the estate tax exemption (5.49 million) and the gift tax exclusion ($14,000 per person per year). My understanding is that this transaction would face an income tax for my mother in law for any profit above 250k. However, she would then be able to gift the planned 200k per daughter but it would have to be reported on IRS form 709 Gift Tax Return (200k-14k gift tax exclusion = 186k for each daughter on the form). I also understand that would limit the tax free future distributions from her estate (5.49 million – 186k x 3).
Is this correct? Any other suggestions on how to minimize taxes on such a transaction? My only other thought was if there was more than 250k profit from the sale of the home and since most of us are looking at a home purchase soon that some sort of 1031 exchange could be helpful, however that would likely require coordination with 3 separate couples with real estate purchases within a limited timeframe and would likely require mother in law to be on the deed as well witch would likely be too complicated to justify any tax savings?
Finally, my wife has a HUGE amount of student loans and is currently on the PSLF track with about 4 years to go. I’m hoping someone can confirm that an inheritance or gift like this wouldn’t make it onto her AGI and affect her IBR student loan payments, since that would be its own big form of taxation.March 26, 2018 at 9:41 am MST #113190CraigyParticipantStatus: SpousePosts: 2012Joined: 09/16/2016
FYI right now the gift, estate and generation-skipping tax exemption amounts are $11,180,000 per taxpayer. The annual exclusion amount is $15,000 per taxpayer, per donee. In the USA the gift-giver pays the gift tax (or consumes exemption amount).
She should consult a qualified estate planning attorney in her state who can assist her with the donation and the income and gift tax consequences.
The income tax question could also be one for her CPA. Depends on her basis in the home and other considerations.
LEVEL 1 WCI FORUM MEMBER.StarTrekDocParticipantStatus: PhysicianPosts: 1956Joined: 01/15/2017
Sounds like several folk needed for this:
Mother in law: 1. Wealthy management planner with one specifically skilled at real estate for all the properties. 2. CPA – since 500k+ on property if this is a primary property in the 2y of 5y rule or straight gains
Beneficiaries – CPA of your own for the receiving portion and affects on things like PSLF. Who knows and don’t want that to bust up your 4 year work on that.March 26, 2018 at 11:58 am MST #113237White.Beard.DocParticipantStatus: PhysicianPosts: 875Joined: 02/06/2016
Is the home in California a personal residence or has it been an investment property that has been rented out?
First you will have to consider the taxes due on the gain from the sale.
A personal residence for a single person can exclude up to 250k in gains from federal capital gains tax.
On the other hand, a rental property sale would involve both capital gains and depreciation recapture. In California that is going to be quite steep. I believe the depreciation recapture can be 25% plus potentially extra medicare tax on top of that, plus extra state tax which is quite high in California. She could end up paying more than a third of the property sale proceeds in taxes. Then she would have to gift the money left over to the children and face possible tax consequences of that transaction, although I don’t know anything much about how the gift taxes work. Ouch! This is one reason to allow heirs to receive property after the death of the owner at a stepped up basis, which means these taxes on the sale of the property disappear. But the estate may be taxed if it is over the exemption limits.March 26, 2018 at 6:16 pm MST #113304