Charles Blair, DDS
John McGill, MBA, CPA, JD
I want to give my son our personal residence without any cost to him. In 1973, I bought it for approximately $150,000. The current tax assessment is $400,000. If I transfer the title to him, what are the tax consequences under the capital- gains rules? Would it be more prudent to transfer the property to him for cash equal to the actual cost of $150,000, or would the assessment value taint such an intrafamily conveyance?
The rules regarding capital gains are income-tax rules and would not come into play if you convey the property to your son as described. Instead, the transfer to your son would constitute a gift in the amount of fair-market value of the property.
Under the current tax law, you may transfer up to $10,000 per year (the "annual exclusion") by gift, tax-free. This amount can be doubled to $20,000 if you are married and your spouse consents to have the gift treated as being made one-half by her. The excess over the annual exclusion amount is a taxable gift. Our current tax system provides a unified credit against gift and estate taxes that allows tax-free transfers of $650,000 in 1999. This credit equivalent is scheduled to increase in increments, and ultimately will reach $1,000,000 per spouse in 2006. These tax-free transfers may be made during life or are available at death to the extent not previously utilized.
A taxable gift to your son, as described above, would utilize a portion of your available unified credit. If you have previously utilized your unified credit, then the gift could result in an actual gift-tax payment.
If you sell the property for $150,000, the transaction would be treated as a part sale/part gift, with the similar gift-tax issues as discussed above. We suggest that you consult an estate planner before making any transfers. A special gifting program, known as a qualified personal residence trust (QPRT), may be the best approach.
My brother-in-law recently suffered a business failure that destroyed his credit rating. Fortunately, he has a new job paying a good salary and is trying to get back on his feet.
I`ve stressed to him the importance of gaining home ownership, so that he will not have to continue to throw his rent payments away. Obviously, because of his poor credit rating, he is unable to obtain a home mortgage in his name alone. I`ve offered to take out a mortgage, buy the house in my name, and let him live there on the condition that he pays all the expenses, including the mortgage. If I follow through with this, will he be able to claim a tax deduction for the mortgage interest paid?
In a recent tax-court decision, the court allowed a mortgage-interest deduction for the renter, even though the renter was not personally liable for the mortgage debt. As a general rule, you must be liable on any debt in order to deduct the interest paid on it. Since the IRS likely will appeal this decision, we would not recommend 100 percent reliance on the tax court`s opinion.
We recommend a sure-fire way to ironclad the home-mortgage deduction for your downtrodden brother-in-law. If the property is owned jointly with him, and he becomes a co-borrower on the mortgage, then he would be entitled to deduct all mortgage interest that is paid.
The information provided in this column is based upon the current Internal Revenue Code, regulations, IRS rulings, and court cases as of the date of publication. This column is not to be construed as legal or tax advice with respect to any particular situation. Contact your tax attorney or other adviser before undertaking any tax-related transaction.
Dr. Blair (left) is a nationally known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($149 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217 or call (704) 424-9780.