There are different rules
regarding the sale of a home versus gifting a home, so let's look at each of these. The same rules apply whether he will be selling or gifting the home to you or to anyone else that is not related.
If your father were to sell his home, he would be subject to long term capital
gains tax on any gain he had from the sale. However, if this was his primary residence, then there is an exclusion he may claim. In order for this to be considered his primary residence, he must have owned the home for at least 2 years and he must have lived in the home for at least 2 of the last 5 years. If he satisifes those rules, then when he sells the home he may exclude $250,000 (or $500,000 if he is married filing
a joint return
) from any gain he has before any excess gain is subject to tax.
His gain is figured by taking the sale price less his basis. His basis in the home is whatever he originally paid for the home plus the cost of any improvements he made while he owned it. So as an example, let's say your father originally paid $50,000 for this home and then made another $10,000 in improvements. That gives him a basis of $60,000. If he now sells the home for $200,000 he has a gain of $140,000. However, if this is his primary residence then he can exclude $250,000 from the gain, which would then leave him with no taxable gain
Using the same example as above, let's say he sells the home for $360,000 and his basis is still $60,000. He now has a gain of $300,000. He would claim his allowed exclusion of $250,000 and only be liable for tax on the remaining $50,000 profit. This would be taxed at the long term capital gains tax rate
which is currently capped at 15%.
If instead of selling the home he gives this to you as a gift, then there is likely no tax due, but it would need to be reported. Under current law
, each taxpayer is allowed to give gifts in their lifetime of up to $1 million in value before any gift tax
is due. However, if someone gives a gift that is worth more than $13,000 in any one year, then the gift must be reported on Form
709. No tax would be due unless the taxpayer had already used up his $1 million lifetime exemption, but the form would need to be filed.
The only drawback to him gifting you this home is that when you receive property
as a gift, you would retain the same basis as your father's basis. So again, using the example above, if your father's basis was $60,000, that same basis passes on to you when you receive the home as a gift. So when you eventually sell the home that would be the basis you need to use in determining if you had any taxable gain from the sale.
If instead of gifting you this home, your father would instead leave it to you in his will, then when you receive property through an inheritance
, you automatically receive a stepped up basis. What that means is that your new basis would be the fair market value of the home on the day you inherit it. By having this increased basis, when you eventually sell the property you will have a much smaller gain to worry about paying any tax on.
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Thank you moore.