Giving Family Member Property

Q: I'm married with 2 children and my mother wants to give me a rental property valued at $58,000.
 

How much will it cost me or her tax-wise if she gives me the property now versus if I inherit it after she dies?

She would like for me to have it now as a source of income. The unit is paid off and rents for approx $550 a month.

A: Your mother can give any individual up to $12,000 per year tax free. If she gives you a gift that’s worth more than $12,000, she must file a gift tax return with the IRS, and that amount is subtracted from the $1 million she can give away tax-free in her lifetime.

If she wants to avoid using up her $1 million in tax-free gifts, she can give the property to you and your spouse and your children just about all at once ($48,000 worth this year), or she can gift you pieces of the property over several years.

There are various ways you can structure the holding of the property and you would be wise to talk to an estate attorney about the best way to have you or your mother hold title to the property. Some of the issues you will face are probate issues – and how to avoid them. Other issues are the income tax consequences of having your mother give you the property now. If you get the property now, you will get it at your mother’s basis. That’s to say, the value for income tax purposes to you would be what it is to your mother.

If you inherit the property, you will inherit the property at the fair market value at about the time of your mother’s death. To put it in perspective, if your mother sold the property today and her “basis” for income tax purposes was almost nothing, she would have to pay tax on almost the entire amount of the sales price. If you were to inherit the property and immediately sell it, neither your mother’s estate nor you would pay any federal income taxes.

These are some of the things to keep in mind when transferring this property to you as a gift.

To avoid probate issues, your mother can also just put the property in a trust, and name you the beneficiary of the trust at the time of her death. That way, you would get the property automatically at the time of her death and avoid having to go to court to have title to the building transferred into your name.

Please talk to an estate or real estate attorney for details and other options.

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