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Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 2421
Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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My aging mother is going to transfer ownership of her house

Customer Question

My aging mother is going to transfer ownership of her house and property to me. In return, I am going to pay off her mortgage, pay the property taxes and insurance, and let her live in the house for the rest of her life. She will file a USA IRS gift tax return as part of the transaction. How should she calculate the value of the gift for the tax return? Is it the value of the real estate minus the value of the mortgage? Or even lower based on the other value she's receiving? What kind of documentation should we maintain for the IRS? (We both live in the US)
Submitted: 7 years ago.
Category: Tax
Expert:  Anne replied 7 years ago.
HiCustomerbr />
Thank you for using justanswer. Your mother should use her adjusted basis as the gift value. Her adjusted basis will be what she paid for the home,plus any and all improvements done to the home during the time she's owned it. Please see below:

Property Received as a Gift

Publication 551 (5/2002), Basis of Assets

If you leave the mortgage in your mother's name and you just make the payments, then you will also have to file a gift tax form IF the amount you pay is more than $14000/year (the current annual exclusion) since under that scenario you would be "gifting" your mother the mortgage payments. Although most people don't think about making a payment on a loan that is not in their name as a "gift", that is, in fact, what those payments become. Please see below:

Publication 950 (9/2008), Introduction to Estate and Gift Taxes

I hope this helps.
Customer: replied 7 years ago.
I'm pretty sure your answer is not correct. If the house is worth, say, $700,000 and I pay off a mortgage worth, say, $400,000, then the reasonable amount of the gift for IRS purposes should be $300,000, not the $700,000 you suggest. I have hired another person to confirm this, and I'll know the answer by the end of the week. If it turns out you were correct, I will certainly accept and pay for your answer.
Expert:  Anne replied 7 years ago.
Double checking answers is always a good idea. What I told you was that the gift must be valued at your mother's cost basis, NOT what the home is worth now.

If you inherit a home, your cost basis in the home is Fair Market Value on date of death (the $700,000 in your above scenario)

If that home is gifted to you, it is gifted at the donor's adjusted cost basis or fair market value, whichever is less. Until recently, real estate had always appreciated in value, so the donor's (your mother in this case) adjusted basis was almost always less. The adjusted cost basis is your mother's original purchase price, plus any improvements made to the home during the time she lived there less any depreciation taken if the home was ever used as business property, as in rental, or even if part of the home was used for business. Please see below:

Publication 551 (5/2002), Basis of Assets

Property Received as a Gift

I hope this helps to clarify things, and again, seeking a 2nd opinoin is, I think, always a good idea if you are at odds with the information that was provided.

Please let me know if you have any follow up questions.
Anne and other Tax Specialists are ready to help you
Customer: replied 7 years ago.
I'm going to accept this because I think Anne deserves to be paid.

But... What I really need to know is whether I can use the fact I'll be paying off the mortgage, and giving her a lifetime of free rent, as a reduction in the net value of the "gift". Anne did not answer this, the core of my question, although I think I was pretty clear the first time and the second time.
Expert:  Anne replied 7 years ago.
Hi Jake

I appreciate the accept, and I'm glad you have asked a follow up question. Please know that you may ask as many follow up questions as you need at no further charge, ok?

I think I mentioned in my first answer that if you pay off the mortgage while it is still in your mother's name (meaning that technically, you are not legally responsible for the debt), then you are in fact, giving a gift to your mother in the form of a paid debt.

Unfortunately, there is no way to "net" your gift of the mortgage out of the value of the home, however, your mother (as do you) has a lifetime gift exclusion of $1million before any gift tax would ever be due. Additionally, no one needs to report a gift until it exceeds $13,000/person/year. That means you can pay up to $13,000 of your mother's mortgage, or she can "gift" you money or property worth up to $13,000 per year with no reporting requirement. as long as you have not exceeded the $1million lifetime exclusion. If you are married, and have children,your mother may "gift" up to $13,000 to each member of your family before there is any gift reporting requirement, and no gift tax is ever due unless you or your mother exceed the $1million dollar lifetime exclusion.

Please see below:

Publication 950 (9/2008), Introduction to Estate and Gift Taxes

There is also no way to net out free rent. However, unless the home has fallen in value (since you said it was roughly worth $700,000 today), all of this is a moot point anyway. Even if your mother's gift of the home to you exceeds her limit of $13,000/per person/per year, she still has the $1 million lifetime exclusion for gifts. Hence, no actual gift tax would be due on the transfer of the home.

Although there is no way for you to net out the value of the free rent, you may deduct mortgage interest you pay on 2 homes on your Form 1040 (Schedules A) Itemized Deductions, and all real estate taxes paid on all properties that you own. Since you're not charging rent to your mother, this would be your only recourse for recouping some of the expenses associated with maintaining what was formerly your mother's home.

I hope this helps.