Saturday, April 28, 2007


The April 26th posting to GINA’S TAX ARTICLES, and a visit from a high school friend and business client with questions, reminded me that one important rule of tax planning is NEVER PUT YOUR NAME ON THE TITLE OF YOUR PARENTS’ HOME DURING THEIR LIFETIME.

If your parents “gift” you an ownership in their home, either partial or total, by putting your name on the title of their personal residence, for whatever reason, they are not doing you any favors!

If you inherit a parent’s personal residence, your “cost basis” in the home is the “fair market value” of the property on the date of death of the parent (or 6 months after, depending on how any required federal estate tax return is filed). If you sell the property shortly after the death you will have no taxable gain, as the sale price should be close to the market value at death.

If you are given the property as a “gift”, the cost basis of the “donor” (your parent) is passed on to you. If you are a co-owner of the property with your parent on the title, you will have a “half and half” cost basis when you inherit the home – one-half of the fair market value on the date of death, and one-half of the parent’s cost basis (what they paid for it plus any capital improvements). If your name is the only one on the title as sole owner, your cost basis is 100% of your parent’s cost basis. In either case you will have a substantial taxable capital gain.

If one parent died and left a joint residence to the surviving spouse and your name is then put on the title as co-owner, the cost basis is a bit more complicated, as your parent had a “half and half” basis at the time of the gift.

If you are co-owner of your parents’ home and it is sold during their lifetime, they will get a “Section 121” exclusion of up to $500,000 ($250,000 if only one parent) on the gain from the sale of their personal residence – and therefore will most likely pay no tax on the sale. However, unless you actually live in the home with your parents and meet the two-year holding period requirement, the home is not your personal residence and you must pay federal and state income tax on your half, or third, of the capital gain.

If you purchase your parents’ home outright that is a different story. Your cost basis is what you pay for the property – assuming you pay a reasonable market price. However, again assuming that you do not live in the home, it will not be your personal residence and you will still pay tax on any capital gain from its sale, but the tax will be a lot less due to your higher cost basis.

You may be able to avoid some of the problems discussed above with a “life estate” - a legal arrangement that allows your parent to have possession of the home during his or her lifetime and, after death, for you to gain ownership of the property. A life estate may also have other financial, estate or Medicare planning benefits.

Any questions?


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