Giving Houses As Gifts

Q: If my wife and I want to give our house to my son and daughter, would there have to be taxes paid? The house is valued at $80,000. --C.W.

A: Would you please adopt me?

The simple answer to your question is no, you probably won't pay taxes. But no tax question is simple. So, we gave the question to Art Weiss, a certified public accountant who heads private banking at Allegiant Bank in St. Louis.

You can give $10,000 a year to each person without any tax consequences. So, you can give $10,000 each to your son and to your daughter. You wife can give $10,000 each to son and daughter. Add that up and $40,000--half the home's value--is tax free.

The rest is taxable, but you won't have to write a check any time soon. The remaining $40,000 gets deducted from your lifetime estate tax exemption of $675,000. That means that, when you die, your children could inherit only $635,000 from you tax free. Most kids don't have to worry about that.

The $675,000 exemption will rise slowly to $1 million by 2006. And the estate tax--even though with exemptions it now applies only to the very rich--may be killed altogether if President Bush and Congressional Republicans get their way.

Weiss thinks you should think twice before signing over the deed. Your kids may escape estate taxes just to get slammed by capital gains taxes.

If you give them the house, they inherit your "basis." That's the price you paid for the house way back when. If they sell the house, they'll have to pay capital gains taxes on the difference between the basis and the sale price.

But if they inherit the house, the current market value becomes the basis--not the price you paid. They could sell it the next day and owe no capital gains taxes.

They can escape the capital gains trap by moving into the house. If they have lived in a home for two years as their primary residence, the first $250,000 in gains is tax free. That jumps to $500,000 a couple.

One more wrinkle. Some old folks give away property to avoid losing it if they have to go to a nursing home and get on Medicaid. But Medicaid looks back three years for major gifts and five years for money put in trusts. Depending on how much you gave away, and how long ago, Medicaid in some states might make you wait before they'll pick up the nursing home bill.

If you gave away $80,000 today, you'd have to wait 32 months before Medicaid would pay your nursing home bill--unless your kids will give some of the money back.

(Distributed by Scripps Howard News Service.)