Tax implications of receiving a house as a gift

In her trust, a dear and wealthy friend of mine has stipulated that the house that I rent from her will be given to me upon her death. There is a mortgage on it and I would need to refinance it at the time I received it from the trust, so essentially she would be giving me her (considerable) equity in the property.

Recently, she decided that she wants me to have the house now for only what she owes on it (fair market value is about $400K; she owes $200K). But I can’t just buy it for $200K because when you sell a house for more than 25% under FMV, the IRS looks up on the difference as a gift and charges a 15% gift tax.

A mortgage broker has recommended that she give me the house through a “gift deed” – that is, she will put my name on the deed and remove hers. The mortgage will still be in her name (it is not an assumable mortgage). In effect, she will give me a $400K property for nothing while retaining responsibility for the lien. The broker suggests that I then get a one-year “private lender” interest-only personal loan, use the funds to pay off the mortgage, and, after the property has been in my name for a year, I can refinance with a traditional mortgage at a low rate. The personal loan would have to be secured with my equity in the house as collateral.

Does this sound kosher to you? I’m concerned that the IRS is not going to see how is this scenario is any different than just buying the house for $200K. I know, I know, you are not a lawyer, you are not giving me legal advice. I am waiting to hear back from an attorney about an appointment but I was hoping to get some input on this to clarify my thoughts. Any ideas are appreciated. Thanks.

There is a lifetime gift tax exemption of $11.58 million. Any gift in a year that exceeds $15,000 may trigger having to file a gift tax return, but as long as the lifetime total of these gifts do not exceed the $11,580,000 lifetime exemption no gift taxes would apply.

Gifts are ONLY taxable to the giver, never to the recipient. As the other comment notes, unless she is already a wealthy gifter, she won’t ever have to worry about it.

A more realistic concern, and one where a financial or legal professional might be needed, is what to do when the house is sold. Currently, you can exclude $250,000 ($500,000 if MFJ) of the value from taxes when you sell it and it’s your primary home, and you haven’t sold another home recently. Whichever method you go with, you will need to figure out if it “resets” the FMV of the home or not.

This looks like it addresses your question.

Basic points -

  • As stated above, gift recipients are not taxed directly. Givers are, with exclusions.
  • When gifted property you are on the hook for the original owners cost basis when you sell vs. with inheritance you get a new cost basis.

Thank you, Icarus, thelurkinghorror, and Bill_Door, for your helpful replies. My mind is much more at ease. As for the capital gains tax or gift tax, I expect to own the property for at least another 15 to 20 years, God willing.

One last question for clarification: Once a property is gifted, the recipient can do anything they please with it, is that correct? So, using it as collateral for a loan is acceptable, regardless of what the loan is used for (as long as it is not for illegal purposes, like buying drugs)?

Thanks again. The Dope rocks!

You own the house, so you can use it as collateral for a loan.

You will take it with the cost basis of the house from the donor (as noted above). This is better than having a zero cost basis. It is less good than inheriting the property at death, when you would receive a stepped-up basis to the fair market value at the time of death. .