Dear Benny: We want to gift our daughter a house that we paid $123,000 for in 1999.
We made approximately $20,000 in improvements to the house. Because of the depressed housing market, we believe the value of the house remains at the price we paid for it.
Because our daughter suffered a stroke, she is on Social Security disability and is unable to work. What effect, if any, would gifting the house to her have on her Social Security disability? And what effect, if any, would it have on us? –Ardath
Dear Ardath: My first question is why you want to even consider gifting the house to your daughter. Are you trying to reduce your estate? Do you have another house, and sufficient assets, so as to live comfortably?
Regardless of your motives, there are several issues you must consider.
First are tax issues. If you gift the property to your daughter, she will receive your tax basis, which you have indicated is approximately the cost.
Tax basis is the value of the property when it was bought, plus any improvements made over the years. When the property is sold, you have an adjusted sales price. That is the sales price less such items as closing costs and real estate commissions. Profit is determined by subtracting the basis from the adjusted sales price.
No big issue there except that if you instead keep the property and leave it to her when you die, she will receive a basis stepped up to the appreciated value as of the date of your death. Oversimplified, this could mean a substantial savings in capital gains tax.
I recognize that readers will say, “Well, if she owns and lives in the house for at least two out of the five years before the property is sold, the daughter can claim the up-to-$250,000 exclusion of gain and may not have to pay any capital gains tax.”
That is correct, but with two caveats. First, the daughter is disabled and may not be able to live in the house for that length of time. Second, Congress may tamper with the exclusion and it may not be with us in the years to come.
Second, there may be gift tax issues.
Because the value of the gift would be greater than the annual exclusion, which is $13,000 per person, you will need to report the gift to the extent the current value is greater than $26,000, i.e., $13,000 each.
So, you would each need to report around $50,000 against their $5 million lifetime exemption. Depending on your total net worth, this may not be a problem for you.
However, the bigger issue is that it is very likely that if your daughter is given the property, her government benefits could be reduced or terminated. There may be an exception for a personal residence so that it may not be counted as an asset for purposes of determining her qualification for disability benefits.
You must consult with an attorney in the state from which your daughter is receiving benefits (or will receive them after she moves to your house). The laws very from state to state on this.
So, before you make your final decision, talk with an attorney on all these issues. You don’t want to do something that can hurt both you and your daughter financially, even though it sounds like a good deed.
Dear Benny: I am a California broker, and here is my understanding of condos, etc.
A condominium building is where an individual owner has the right of sole occupancy of the air space within the walls of the unit but owns the land, etc., only in common with the other owners.
A townhome is a physical design. The owner may own the land underneath the home, in which case the legal state is a planned-unit development, but it also may legally be a condo where the owner does not solely own the land underneath just like a condo.
Then there is a “de minimis” planned-unit development, where there are single-family homes but where such items as streets, recreation facilities, parks, etc., are owned in common with the other owners.
All of the above have homeowners associations, which are controlled by the governing documents, namely, articles of incorporation, CC&Rs and bylaws.
These terms should not used interchangeably. –Jo
Dear Jo: Thanks for writing.
You are right on and have confirmed my opinion that a condominium is not a homeowners association and vice versa.
If you want to lump them collectively, the correct term is “a community association.”
Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to firstname.lastname@example.org.