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socrateaser, Lawyer
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I have a question regarding gift taxes for foreign spouses. My

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I have a question regarding gift taxes for foreign spouses.

My parents are Canadian Citizens and nonresident aliens to the U.S. In March, my father bought a new house in San Jose. He is listed as the sole buyer on the purchase agreement, thinking that he may add my mother's name to the title later when closing the escrow. The estimated closing date is in late September. It's a cash purchase of approximately $800,000.

A few days ago, we contacted the escrow company regarding the signing appointment before closing of escrow. The escrow agent told us that only people listed on the contract (which I assumed is the purchase agreement) can be put on the title. So only my father's name will be put on the title. However, since California is a community property state, my mom will need to sign an interspousal deed. Here are my questions:

1. Is it true that when closing, only people listed in the contract can put their names on the title? My father thought that since they are a married couple, he can put both their names on the title when closing, regardless whether my mom signed the contract.

2. What is the purpose of this interspousal deed? Does it mean my mother is transfering her portion of the title to my father? Or does it mean my father is transferring half of the title to my mother?

3. Is there any tax consequence after signing this interspousal deed? Would that be considered a gift of $400,000 between my parents? Both of them are foreigners so they only have a $128,000 gift tax exemption. And they don't qualify for the 5 million lifetime estate exemption. Do they have to report and pay gift tax after signing the interspousal deed?

4. If signing the interspousal deed leads to paying gift tax, we will ask the builder to see if we can add my mother's name to the purchase agreement as an addendum so the title company can put both their names on the title when closing. It's a cash purchase so no lenders are involved. Is this feasible?

Thank you.
Submitted: 1 year ago.
Category: Tax
Expert:  socrateaser replied 1 year ago.
1. Is it true that when closing, only people listed in the contract can put their names on the title? My father thought that since they are a married couple, he can put both their names on the title when closing, regardless whether my mom signed the contract.

A: No, it's completely false. Title can be taken in any manner that the buyer requires. There is no legal restriction -- so, I can't point you to a law that confirms this, because there simply isn't any.

However, if there is a lender involved in the transaction, the lender may require that the spouse sign as a coborrower -- and that may affect the underwriting of the loan, if the spouse has bad credit.

2. What is the purpose of this interspousal deed? Does it mean my mother is transfering her portion of the title to my father? Or does it mean my father is transferring half of the title to my mother?

A: An interspousal deed operates to transfer real property between spouses as a gift, so that there is no "change in ownership" under California and federal tax law, which would otherwise trigger tax liability. However, because the parties to this transaction are aliens, the deed transfer will trigger gift tax liability, so do not use an interspousal deed. The spouse needs to be on the deed when the purchase is completed.

3. Is there any tax consequence after signing this interspousal deed? Would that be considered a gift of $400,000 between my parents? Both of them are foreigners so they only have a $128,000 gift tax exemption. And they don't qualify for the 5 million lifetime estate exemption. Do they have to report and pay gift tax after signing the interspousal deed?

A: I must be clarvoyant. I hadn't read your question before I answered the previous question.

4. If signing the interspousal deed leads to paying gift tax, we will ask the builder to see if we can add my mother's name to the purchase agreement as an addendum so the title company can put both their names on the title when closing. It's a cash purchase so no lenders are involved. Is this feasible?

A: Funny, I hadn't read this question, either, until now. However, now that I think about it a bit more, if both spouses are not named on the purchase contract, then it could be argued that putting another spouse's name on title is effectively a gift, which would trigger tax liability -- so, yes, in my opinion, you need to have the contract modified to add both spouses -- in order to avoid a potential gift tax liability problem.

Hope this helps.
Hope this helps.
Customer: replied 1 year ago.
Thank you very much for your detailed reply. I think when my escrow agent suggested my mom to sign the interspousal deed, she meant to ask my mom to quit claim on the house so my dad can close the house as the sole owner. If we keep my father as the sole owner of the house when closing, do you think this could be a way to avoid potential gift tax liability? Thank you.
Expert:  socrateaser replied 1 year ago.
If your dad is the sole owner, then there's no gift and no tax liability. However, if your dad dies, then his estate will have a substantial estate tax liability, which would be halved if the property is held by both husband and wife.

So, I would conclude that this is a suboptimal choice.

Hope this helps.
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 34856
Experience: Retired (mostly)
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