Real Estate for Christmas

30 Nov

By Attorney George Warshaw

It’s Christmas and Hanukkah time. Naturally one’s thoughts turn to gifts.

As families get together, oftentimes the discussion shifts to a parent’s home. Is it better to gift it now or inherit it later?

While the answer requires a careful discussion with a tax advisor, it’s helpful to review a key gifting rule.

When a person receives a gift of real estate, the gift is valued for tax purposes at the same cost+ value (or “tax basis” in accountant-speak) as the giver has in it.

Bought a home years ago for $200,000, put $50,000 in improvements into it, and your tax basis is likely $250,000.

Give it to your kids today and the IRS will likely value the gift as worth $250,000. It doesn’t matter if the house is worth $1,000,000, the gifting value is still $250,000.

If your kids later sell it for a million, the IRS deems they made a profit of $750,000 (sale price minus tax basis) – and they may have to pay a tax on the $750,000 gain at the time of sale. That’s painful!

Next week: Is it better to Inherit Real Estate?

Always consult your tax advisor or attorney before gifting real estate. The foregoing is not intended as legal advice. Only an in person consultation with an attorney can establish an attorney-client relationship. © 2011 George Warshaw.

George Warshaw is a real estate attorney and author. He represents buyers and sellers of homes and condos in Massachusetts, and prepares wills, trusts, and estate plans. George welcomes new clients and questions at george.warshaw@warshawlaw.com.

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