What Are the Tax Repercussions of Gifting a House?

Note: The DearEsq free 'ask a lawyer' site is offered as a free informational service to the public and is not intended as legal advice. Laws vary from state-to-state, and in addition every situation is unique, and relevant facts may not be known. The answer to the question posed below may not apply to in your state or to your situation. For legal advice in your state and your situation you should consult with an attorney in your state who is familiar with the rules and laws in your state.

“In February of this year, my fiance and I decided we wanted to move out of our apartment and rent a house. My dad had been considering buying a rental property, so together we found a house that we liked. It ended up being a HUD home, so we got a great deal on it, but one requirement was that it had to be owner occupied for at least one year after buying. To deal with this, we put my name on all the paperwork for buying the house. My dad took out a home equity loan on his house to pay for it, then “gifted” the money to me. We were advised that if my mom gave me half and my dad gave me half, there would be no tax issues because it was under the amount that a parent can legally give their child. However, we are probably going to be buying a home of our own in a couple years, so at some point I will be giving ownership of the property to my dad. My question is about the tax liabilities of this transaction. If I just add him to the deed, then take myself off a few years later, is that considered me “gifting” it to him? The house cost around $50K, but it was last appraised at $100K (there was water damage and mold in the home, along with other issues, which is why it was sold at such a low price). What would the tax repercussions be for this transaction? This all happened in Wichita, KS if that helps.”

Tax issues can be very particular to your situation, and should be reviewed with a tax advisor before taking any steps. The same person who advised you that the transfer from your parents to you would have no tax effect should be able to advise you whether you can transfer back without an effect.

That having been said, a couple of things to keep in mind:

First, I am not aware of any special rules for transfers from parents to children. Every person has the legal right to make gifts up to a certain amount ($13,000 this year, $14,000 in 2013) without any gift tax effect. This is per person, so you can gift $13,000 to person 1, another $13,000 to person 2, and so on.

If you exceed this annual exclusion amount, that does not necessarily mean you will owe any tax. Each person has a single lifetime exemption amount that they can pass free of tax, though you do need to file a gift tax return to acknowledge that you’re using up some of that lifetime exemption. This year, that exemption amount is $5,120,000; it is set to return to $1,000,000 in 2013, although Congress may make changes to this at any time.

Finally, keep in mind that if there is a mortgage on the house, what you are gifting is not the value of the house, but the equity (the value minus the mortgage).

There are many factors that my come into play when making a large gift, so it is always a good idea to confirm your plans with your tax advisor first.