How do I avoid the gift tax when I change the name on the deed of my property? My mother owns a condo (zillow estimated value: $226,500). My parents reside at the property until 2009. At which time, my parent moved in with me and converted the proper to a rental unit. At this time, my mother would like to transfer the condo to me. Her name is the only name on the grant deed. We planned to use a simple quit claim deed to do the transfer. Our documentation specialist (Legalzoom in this case) indicated that this transfer may trigger a gift tax for my mother. I would like to better understand the gift impact in this case. Furthermore, is there any way to avoid the gift tax? My mother is retired. Her annual income is just social security (~$12K per year). She has been taking money out of her IRA on a annual basis. She takes out about $45K per year.

ANSWER

The BIDaWIZ Team's Answer:

Gifting rental property can be tricky and is not always the best option from a tax perspective looking down the road. Your mother will be responsible for filing a gift tax return (IRS form 709) since she is gifting you property with a fair market value that is greater than the $13,000 annual exclusion. The property will need to be appraised properly but it doesn't appear as though she would owe any taxes since should could claim the lifetime gift tax exclusion which is $5.12 million for 2012 via Form 709. You likely won't owe any initial taxes either. However when property is gifted, you would receive both the property and the property's initial cost basis including adjustments. In contrast, if the property was inherited, you would likely receive the stepped-up basis which is the fair market value at the time of death. For instance, if your mom initially purchased the property for $100,000 and gifted it to you now, your basis would be $100,000. If you inherited the property, your basis would be the fair market value at the time of death or what could be $225,000. The higher the cost basis, the less capital gains taxes you would owe when you eventually sell the property. Just something to think about.