Talk with a tax expert before transferring title

One family buys grief in three tax arenas

February 16, 2003|By Liz Pulliam Weston | Liz Pulliam Weston,SPECIAL TO THE SUN

My mother-in-law still lives in her home of 45 years, but she transferred the title to my wife and sister-in-law. We're wondering now about the possible tax consequences of that move. The home was bought for about $25,000 and is now worth $125,000. Also, it's possible my mother-in-law may want to sell her house sometime. If so, wouldn't we need to change the title before the sale? Otherwise, wouldn't my wife and sister-in-law have to pay taxes on the profit? Was there a better way to handle this?

Almost any way would have been better.

This, unfortunately, is what happens when people start transferring real estate titles without first talking to a qualified tax professional. Your family has managed to complicate its situation in three tax systems: the gift tax, the estate tax and the capital gains tax.

If your mother had added your wife and sister-in-law to her title, the consequences wouldn't have been nearly so bad. The transfer would have been considered a gift, but your mother-in-law would have owed no gift taxes. (Each person is allowed to give away as much as $1 million in his or her lifetime without having to pay gift taxes.)

And, as mentioned in this column before, the home would not lose its favorable tax treatment when she died as long as she remained on the title. The IRS typically would include the entire value of the property in her estate when she died and the house would get a full step-up in value, said Bruno Graziano, estate tax expert for CCH Inc., a tax research company. That means, for tax purposes, the house would be valued at $125,000 or whatever its current value was, rather than the $25,000 she paid for it.

So the sisters could inherit the home and sell it shortly after her death without owing any taxes on the sale.

As it stands, however, the home not only has been gifted to her children but also has lost the ability to get that favorable tax treatment at her death. Instead of getting a new value for tax purposes, the home retains its original basis. Instead having of a tax-free sale at her death, the sisters would owe capital gains on the difference between the sale price and the much lower basis value.

The sisters would run into similar tax problems if their mother wanted to sell the home. Had your mother-in-law remained on the title, she could have claimed as much as $250,000 in tax-free home sale profit, because she has lived in the home more than two of the last five years (the minimum for claiming the full home profit exclusion). Because her daughters don't live there, however, they wouldn't qualify for the exclusion.

Straightening this out could cause problems of its own. An argument could be made that transferring the title back would require the sisters to file gift tax returns. And the details of exactly how it should be done would be dictated by your state's laws. So - better late than never - it's time to hire an attorney and a tax pro so you can get good advice about the best way to put this right.

I'm in the process of renting my house for the first time and want to know the best way to do a credit check on a potential renter. I'm not working with a real estate agent, but was wondering whether I could ask a bank or credit union to do this for me.

You'd be smart to run not just a credit check but a full tenant screening on anyone to whom you entrust your keys. Tenant screenings include credit reports, criminal histories and previous evictions, if any. The cost is nominal - typically $20 to $30 - and the potential peace of mind immense.

There probably are plenty of tenant screening services in your community. For references, talk to your local landlord association.

Liz Pulliam Weston is a contributor to the Los Angeles Times, a Tribune Publishing newspaper.

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