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My wife and I are thinking of gifting our Virginia house in 2013 (purchased at US$220,000 and estimated sale value US$400,000) to our daughter and son living in Flordia through a quit claim deed? What are the tax implication for us and for them in 2013? Also if my daughter and son decide to gift the home back to us in 2013? or in 2014? What are the tax implications for all of us? My wife and I file joint tax return and my daughter and son file individual tax return.
ANSWER
The BIDaWIZ Team's Answer:
Can you please describe the reason for using a quit claim deed to gift the property to your son and daughter? We don't know all of the facts in your situation, but with all else being equal, we don't really see a point of using a quit claim deed now. As you may have heard, congressional leaders recently agreed to extend both the lifetime gift tax exemption and estate tax exemption at $5.25 million for single filers and $10.50 for joint filers for the foreseeable future. If this hadn't occurred and the exemptions fell significantly or were scheduled to in the near future, we would understand setting up a quit claim deed. Here's why we came to this conclusion:
If you gift the property to your son and daughter now, they would assume your cost basis of $220,000. This can be an issue because your children will have to pay capital gains tax when they eventually sell it on that same basis. If you don't gift the property, then they will inherit the property with a "stepped up" cost basis equivalent to the fair market value at the time of death. For instance, if both parents pass away in one month and the home is worth $450,000, the cost basis will be that value. This means that your children will likely pay little or no capital gains tax should they sell the home shortly thereafter.
Another point to consider is that if you sell the house for a profit as your principal residence, you are allowed to exclude up to $250,000 of the capital gain as a single filer and $500,000 as a joint filer. If you gift the property to them via a quit claim deed now and they don't live in it as their primary residence, no one will be able to take advantage of that tax break.
