“Now that you rented your old house to your daughter, that home may be considered a rental home on your federal income tax. You get to treat that as an investment property and can take some of the tax advantages available to investors, including taking depreciation on the home, deducting expenses for the upkeep, as well as deducting real estate taxes and other expenses.”
As we age, our needs change. That includes our needs for the property that we own. For one person, the family home was rented to the daughter and her spouse as a “rent-to-own” property. This is generous, since it gives the daughter an opportunity to build equity in a home. The parent had questions about what kind of a deed would be needed for this transaction, and if any gift taxes need to be paid on the gift of the house and a separate parcel of land. The answers are presented in the article “Dealing with property transfers and gift taxes” from Chicago Tribune.
For starters, there are tax advantages while the person is living, since the home is an investment for the owner, as described above. On the day that the home is deeded over to the daughter, she will own the home at the cost basis of the parent. Here is why. The IRS defines the “cost basis” of a real estate property as the price that the owner paid for it, plus the cost of purchase and any fees associated with the sale plus the cost of any new materials or structural improvements.
When you give someone a home, they receive it at the price that was paid for it plus these costs.
Let’s say this person paid $50,000 for the family home, and it’s now worth $100,000. If you give the home to a family member, it’s as if she paid $50,000 for it, not $100,000. There may be tax consequences when she goes to sell it, but that’s in the distant future.
It’s different if the home is inherited. In that case, if the house was valued at $100,000 on the date that the owner died, the heir’s cost basis would be $100,000. However, if the heir sold the property on the exact same day (this is an unlikely scenario), there would be no tax owed on the sale for the heir.
This is a very simplified explanation of how a home can be passed from one generation to the next. It would be best to speak with a good estate attorney, who can evaluate all the factors, since every situation is different. One suggestion might be to put the property into a living trust, in which case the daughter will still pay rent to the parent, but then would inherit the property when the parent died.
The estate planning attorney could use the same living trust for the separate parcel of land. Once the home and the land are deeded into the living trust, the owner can state her wishes for how the properties are to be used.
As for the question of gift taxes, anyone can give anyone else $15,000 per year, with no need to file any forms with the IRS or pay any taxes. If you give someone more than $15,000 in one year, the IRS requires a gift tax form with the federal income tax return.
A meeting with an estate planning attorney is the best way to ensure that the transfer of a family home to a family member is handled correctly and that there are no surprises.
Reference: Chicago Tribune (April 23, 2019) “Dealing with property transfers and gift taxes”