Regarding the transfer of the house, your mother will need to file Form 709 which is a Gift Tax
Return. More than likely no gift tax will actually be due, but this is the form she needs to file. It is a separate return and it is not part of any personal tax
return which she would file.
Under current law
each individual is allowed to give gifts in their lifetime of up to $1 million before any gift tax becomes due. There is also an annual exclusion of $13,000 on gifts which does not even count towards your lifetime exemption, but gifts that exeed the $13,000 annual limit must be reported on Form 709. No tax would be due with the form as long as your mother has not already used up her allowed lifetime exemption of $1 million, but the value of the gift reported would then reduce her remaining lifetime gift exclusion amount.
On Form 709 it will ask for your mother's adjusted basis in the property. That will be the price she paid for the home plus the cost of any improvements she made. The form will also ask for the current market value of the property.
As far as your parents needing to file a tax return, if their total income for the 2008 tax year was less than $17,900, then they do not need to file a return, unless any of their income was from self employment. If they had self employment income of $400 or more, then they must file a return. But if their only income was from wages or retirement benefits, then no return is needed if their combined income is less then $17,900.
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Thank you 6421
Edited by Merlo on 10/2/2009 at 8:45 PM EST