Most parents shouldn't worry about federal 'gift tax' rules

Posted2/3/2017 6:00 AM

Lots of folks provide down-payment help to their kids to buy a home. The Internal Revenue Service treats such gifts gently when mom and dad file their tax return.

Q. We want to help our son and daughter-in-law buy their first home by giving them part of their down payment, but we don't know how the federal "gift tax" works. Can you explain?


A. Sure. Under federal law, both you and your spouse each can give up to $14,000 to your son without triggering the gift tax. If you're flush with cash, each of you also could gift $14,000 to your daughter-in-law.

That would be a total of $56,000, a hefty down payment in nearly every U.S. housing market.

Even if your largesse tops $56,000, you probably still wouldn't have to pay any gift taxes for this year. That's because the Internal Revenue Service allows an individual to give away $5.49 million in cash or property over his or her lifetime, plus another $5.49 million by a spouse.

If you're like me and (I assume) most of my readers, the gifts you make over the course of your life probably won't get even close to that multimillion dollar limit. But if they might, you can certainly afford to consult a professional accountant and estate-planner for help.

President Donald Trump and a handful of congressional lawmakers have been floating an idea to eliminate the gift-tax rules entirely, allowing parents to give as much money to their offspring as they want without fear of triggering a big bill from the IRS later. But insiders on Capitol Hill tell me that there's little chance of such legislation gaining Congressional approval, because it would potentially allow millions of property owners to skirt existing tax law and "rob" the U.S. Treasury of billions of dollars in revenue.

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To illustrate, let's say that you're a successful doctor or lawyer who makes $500,000 a year, but you have an 18-year-old son who is just starting college and makes $4,000 per year from his part-time job. You own a rental apartment building that you bought several years ago, and can now sell it for a $1 million profit.

Because you're in the nation's top tax-bracket of nearly 40 percent, you'd have to pay the top long-term capital-gains rate of 20 percent ($200,000) on the profit.

If the current gift-tax rules are abolished, though, you could "gift" your teenage son the apartment building without incurring any immediate tax liability. Your son could then sell it, collect the $1 million in profit and pay nothing in taxes, because long-term capital gains aren't levied on people who are in the nation's lowest tax brackets.

He could then gift the net profit back to you. You would save $200,000 in federal taxes on the sale, but the Treasury would lose out on an equal amount of revenue.


Gift-tax rules are tricky, so it would be wise to consult an accountant or similar professional before writing a check to help your son and daughter-in-law make a down payment on their first home.

Real estate trivia: The U.S. Census Bureau reports that the city of Sumner, Illinois (pop. 5,073) has the highest percentage of male residents in the nation. More than 92 percent are guys, not dolls -- mostly because half the townspeople in the small community are behind prison bars at its male-only Lawrence Correctional Center.

Q. One of my New Year's resolutions is to buy one of the low-priced foreclosure properties in my area and turn it into my first rental. Is it better to buy a foreclosure from a bank or at a court auction?

A. It's usually best to buy a foreclosure from a bank. That's because lenders typically wipe out any other liens against the property, such as a second mortgage or (sometimes) a lien that a contractor may have placed on the home for work that went unpaid.

A court auction typically doesn't include that important advantage, and often prohibits potential buyers from even inspecting a home for possible problems before making a bid.

In addition, many banks today are offering good financing packages or other valuable incentives to sell their foreclosed homes quickly. Court auctions usually are made on an all-cash basis, which will prevent you from bidding unless you have lots of money in a savings or brokerage account or have instant access to a large line of credit.

Q. My roommate and I have lived in the same apartment for three years. The landlord has always paid for our utilities, but recently sent us a certified letter stating that we will have to start paying for our own gas and electric bills because utility costs have gone up. Is this legal?

A. Yes, it's legal. You will definitely become responsible for paying your utility charges sooner or later, depending on the type of rental agreement you and your roommate have with the landlord.

If you rent on a month-to-month basis, the landlord can likely force you to begin paying for your utility expenses within 30 days from the receipt of your certified notice. But if you have a long-term lease stating that those costs are included in the monthly rent, you shouldn't have to start paying the gas and electric bills until the lease comes up for renewal. Contact your local rent board or similar agency for more information.

• For the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 4405, Culver City, CA 90231-4405. Net proceeds will be sent to the American Red Cross.

© 2017, Cowles Syndicate Inc.

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