In August 2009, my wife and I — both now 75 years old — purchased a foreclosure condominium in Port Hueneme, Calif., for $120,000 in cash. Since that time, our son has lived rent-free in the home. We have paid both the homeowners association fees and property taxes amounting to $2,000 per year because he works minimum-wage jobs.
We told our son years ago that someday the property would be placed in his name. Recently, we have both agreed to transfer the property from our family trust into his name.
So here is my question: Today, the condo’s value is approximately $250,000. If we do a quitclaim deed over to our son, what, if any, tax consequences would there be? And whose responsibility to pay those consequences, us or him?
Note: We are currently discussing whether he might sell the house and move, or stay and refinance.
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It’s wonderful to see how generous your wife and you have been to your son for the past decade-plus. I am sure he’s immensely grateful for your assistance. That gift — because, yes, it was a gift — surely helped him make ends meet on a limited budget, and especially amid the worst years of the Great Recession.
I’m also glad that this exchange between the two of you and him is clearly being discussed openly among everyone involved. Too often, my colleagues and I hear from readers who are struggling to sort out tough financial issues among family, and inevitably secrets and biases get in the way of clear-headed judgment.
Before I delve into the potential financial ramifications of the transfer, I want you and your wife to consider what your goal in transferring the property is. Are you trying to give your son more financial freedom? Are you trying to take a financial load off your own backs?
I ask these questions because this isn’t a decision to make lightly. As Matthew Saneholtz, senior wealth adviser and co-owner of Tobias Financial Advisors in Plantation, Fla., suggested when I described your situation, transferring the condo to your son could take away valuable financial options for you and your husband.
“They would no longer be able to deduct the taxes paid if [the property was] owned by the son,” Saneholtz said, adding that you also would be losing a potential back-up plan.
“Anything can happen in life and it may be in best interests of the parents to hold the option of potentially selling the property for their use or needs as opposed to gifting to their son who may not give it back,” he said.
There are other financial considerations that you and your wife already appear to be considering. Quitclaiming the house to your son would be considered a gift, since he wouldn’t be paying you for it. You would need to file a gift-tax return, since the condo’s value is higher than the annual exclusion ($32,000 for a couple, in 2022).
“Quitclaiming a home to a child would be considered a gift to the IRS.”
With the gift tax, there is also a sizable lifetime exclusion, so any gifts made below that amount aren’t ultimately taxed. But if you exceed that amount — $11.7 million as of 2021 — then taxes would be owed. You would be the ones to pay them.
The other main consideration here is the tax basis for any capital gains once the condo is sold. The cost basis for a home is the price that was paid to purchase it, plus the costs related to renovations and other expenses. In this case, the condo was bought for $120,000 — so assuming it sold for $250,000, the capital gains would be $130,000, before any other costs were factored in.
Typically, when a child inherits a home from their parents, they receive a step-up in basis, so the cost basis used to calculate capital gains is adjusted to be the property’s value at the time of their death. This can lead to major tax savings. Usually the difference between a home’s sales price and the stepped-up basis is very little since heirs typically sell the home soon after inheriting it.
By quitclaiming the home to your son, he would not be eligible for the step-up in basis. So the cost basis used to calculate any future capital gains would be the price the two of you paid in 2009.
Imagine a scenario where you put the deed in your son’s name, and he sells the condo for $500,000 a decade down the road because of rising property values. The capital gain would be $380,000. If the condo was still his primary residence and he was single, he would be exempt from paying capital gains taxes on the first $250,000 he profited, but would owe taxes on the rest. If he had converted the condo into an investment property, he wouldn’t qualify for that exclusion and would need to take other steps to avoid a large tax bill.
Given the potential tax savings at hand, it’s worth reconsidering the strategy you all are considering. It may be in your son’s interest to have the home stay in the family trust until you and your wife pass away, so he can qualify for the stepped-up basis.
“Putting the property in the son’s name could expose it to creditors.”
But taxes are only one of my concerns. My bigger worry is that your son may not be prepared to handle the costs of owning a home. You didn’t say whether the two of you would continue to pay the property taxes and condo fees for the unit after it’s in his name. If that’s the case, you need to make that clear to him and ensure he has enough money saved up or a large enough income to cover those expenses.
Also, if the home is in his name, it could fall prey to creditors. If your son has any outstanding debts, those companies could seek to recoup their money via the condo. And I’d be careful about assuming he could simply take out a refinance loan to cover those debts. Mortgage lenders must assess a prospective borrower’s ability to repay. Depending on his credit score and debt-to-income ratio, he may not qualify for a loan.
Before you move forward, enlist the assistance of an attorney, an accountant and/or a financial adviser who could walk you through your options and help you decide the most advantageous option. The last thing I’m sure any of you would want is for this gift to become a burden.
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