Q: My husband’s parents bought lake property 48 years ago for approximately $15,000. Today it is valued at about $600,000. His mother is still living but is in a nursing home and does not use the cottage.
We have been told that a quit claim deed signed by her today would give us the cottage with no tax consequences (gift or capital gains). Is this possible? Would putting my husband’s name on the deed as co-owner attach any gift tax liability? Is there any way for him to receive the property without some sort of tax issue for either him or his mother?
A: Your mother-in-law has the right to gift the home to your husband. Federal income tax and gift tax laws would allow your mother-in-law to give the home and not pay any taxes. Likewise your husband could receive the home and not pay taxes. Your mother-in-law might have to fill out gift tax forms relating to that gift to her son, but the $600,000 value is well below the limit allowed by the federal tax code before she would have to pay gift taxes. (As of 2010, a person can give gifts in value of up to $1,000,000 total before having to pay the federal government taxes on the gifts.)
As an aside, in 2010 a person can give a gift to anybody of up to $13,000 per year without that amount being included in the amount considered for taxation by the federal government.
Now if your mother-in-law gifts the home to your husband, his basis for the home will be approximately the amount his parents paid for the home. Conceivably that amount could be $15,000 but may also depend on how your mother-in-law and father-in-law held title to the property, when your father-in-law passed away and what the value of the property was at the time of his death. But for simplicity sake, let’s assume that your husband’s basis when he becomes owner of the property is $15,000 and we assume that the family never put any capital improvements into the home.
At that $15,000, if you guys sell the home, any sales price above the $15,000 would be considered long-term capital gains if you hold on to the home for at least one year.
The estate tax laws are in flux at the moment, but in prior years if your husband inherited the property from his mom, he would have inherited the home at the home’s value at the time of his mom’s death. Under the old law – and perhaps if they change the law back to where it previously was – if you inherited the property and then sold it, your mother-in-law would not have paid any income or capital gains taxes on the sale of the home and neither would your husband.
Due to the changes that have occurred and may still occur in the tax laws relating to estates, the best course of action would be to sit down with an estate attorney to start making plans on how to handle title to the property now and plan for any tax consequences in the future.