Last week I met with siblings, one of whom wanted to give real estate to the other. They requested we prepare a deed of gift from one to the other. Transfers of real estate among family members occurs with some frequency. Parents give land to a child during lifetime, for example. However, STOP! RECONSIDER how you structure this transaction. The transfer of real estate to a family member by gift means they take your tax basis in the property which can lead to a big capital gains tax liability later for the person receiving the property.
Let’s say Father inherited farm land in 1980 from his father who acquired the property in 1950 for $15,000. Father now wants to give the land to his own Son. The property is now worth $185,000. If Father gives the land to Son, Son takes the Father’s inherited tax basis of $15,000. This is also known as “carryover basis.” If Son later sells the land for $250,000, his gain will be $250,000 minus $15,000, or $235,000. That’s a big gain.
If instead of giving the property to Son outright, Father had left the property to his son in his will or revocable trust, the son would have gotten a step up in the tax basis to the value of the land as of the date of Father’s death. If Son later sells the land, he only pays capital gains tax on the difference between the sales price, and the value of the property as of the date of Father’s death.
Other ways of transferring the land to Son without creating a capital gains tax problem include doing a “transfer on death” deed or a deed of gift to the son while retaining a life estate.
For my clients today, we discussed the capital gains tax implications of an outright deed of gift, and the clients chose to go a different route. Tax time bomb averted!