Dear Edith: My aged parents are about to put their house in my name. What are the tax implications for me, other than annual property taxes? Is this considered a gift that I have to claim as income? — M.
Answer: First, property taxes: Your folks could continue paying them if they wish, though they couldn't take them as income-tax deductions because they wouldn't be legally responsible for them.
Next, gift taxes: Your state doesn't have any, and a gift isn't considered taxable income. The IRS says your folks can give you up to $14,000 a year with no tax consequences. Anything beyond that is deducted from what they could leave free of estate tax. That's currently more than $5 million. But there's probably nothing to worry about there either.
Then, when and if the house is sold, there's capital gains tax. If your parents have lived in the house and owned it for at least two of the past five years, they can use the homesellers' exclusion to sell and take up to $500,000 of the profit free of income tax. You, on the other hand, would not have that right, unless you were also living there for those two-plus years.
Once you own the house, if it is sold, your profit will be subject to capital gains tax. If you receive the house as a gift, you also take over your folks' cost basis and owe tax on the profit they would have made. If you wait to inherit, on the other hand, you receive a stepped-up basis, valued at the time of death. Sell for about that amount with no capital gains tax.
One other complication: If your parents are trying to divest themselves of assets in order to qualify for Medicaid assistance, they should know there's a five-year look-back. Medicaid will still count the house as their asset for five years after the transfer.
You and your folks could probably use a lawyer who specializes in estate planning. A professional who can ask about your situation and what you're trying to achieve will have the best advice.
Two Years Overpriced
Hi, Edith: I am a real estate broker. The letter in your column from a neighbor complaining about a nearby house that had been for sale for two years sounds like one of our listings — it fits it to a T. As you have previously mentioned, we can't drag buyers in by the hair to look at overpriced properties.
The owner recently relisted with another broker with a price reduction; it sold in six days. — Anonymous
Answer: You have my sympathy.
Father's Building Site
Ms. Lank: My father has a beautiful building site he is willing to let me have. Can you build on property you do not own? To be fair to my siblings and the IRS, I have proposed to include a letter that I owe his estate upon his death. — M. T. M.
Answer: Yes, you could build there. But if your father still owns the land, anything permanently attached becomes part of the real estate and belongs to your father.
A lawyer or a CPA may have a suggestion that would be fair to both you and your siblings. Perhaps, for instance, ownership of the lot could be transferred now and your father's will modified accordingly.
Ms. Lank: My husband and I are ready to start looking for a house to buy. Our Realtor suggests we get preapproved for a mortgage, but my husband thinks that's too much trouble before we're even sure we're going to buy. He says pre-qualified is enough. Is there a difference? — L.
Answer: Your real estate broker has already asked you some personal questions about your finances. He or she is fairly certain you can afford to buy a house. That pre-qualifying lets the broker know it's worth investing the time and trouble to work with you.
Preapproval, though, is a more formal procedure. A lender will investigate and verify your credit, assets, debts and income. It's a process you'll have to go through eventually. It means a mortgage lender is ready to furnish the money you'll need for your purchase. When you've found the house you want, the seller will know you're good as gold, as welcome as an all-cash buyer. Assuming the house you want meets the lender's standards, there won't be any financial roadblocks to a smooth transfer of title.
When you can produce proof that you're preapproved, your purchase offer might beat out others that came in at the same time. It might even be worth a price concession.
One caution, though: There's no point in letting potential sellers know the exact amount you're qualified to borrow. You and the lender will have agreed on that, but you don't want a seller knowing your top figure while you're still negotiating the purchase price.
Contact Edith Lank at www.askedith.com, at [email protected] or at 240 Hemingway Drive, Rochester NY 14620.