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Q: Gift tax and Capital Gain on a house ( Answered,   2 Comments )
Subject: Gift tax and Capital Gain on a house
Category: Family and Home > Seniors
Asked by: lily1958-ga
List Price: $30.50
Posted: 03 Jun 2006 19:32 PDT
Expires: 03 Jul 2006 19:32 PDT
Question ID: 735113
My mother (widow since 1991) is thinking a gift my brother her home in
Miami, Florida. Which was purchased in 1973 for $35,000,00. The FMV of
this home is between $250,000.00 and $280,000.00. Once it is gift over
to my brother, he is going to take a loan out against the home and
give this money to my mother (she will be going to a skilled nursing
facility because of illness). I spoke to an attorney who informed me
that my mother will have to pay gift tax and that she should just sell
the house. My brother spoke to a CPA, who said, not so because of
something called Capital Gain. My mother only other source of income
is her Social
Security check of $1,200.00 a month before taxes, so all of that money
will be needed for her stay at the skilled nursing facility. Now if
she goes ahead and sells the house for the FMV, will she have to pay
taxes on that. Because of her health condition we have to make a
decision soon. Thank you, very much.
Subject: Re: Gift tax and Capital Gain on a house
Answered By: alanna-ga on 03 Jun 2006 23:19 PDT
Hi lily1958-ga -

I'm sorry to hear that your mother is in poor health.  First off, I'd
like to suggest that the final decisions you make regarding your
mother should be taken with expert advice of an attorney or an

To help you in this process, I'd like to point you to the Internal
Revenue Service's regulations regarding (1) the profit realized by the
sale of your mother's house; and (2) the gift tax.


Your mother stands to realize a gain of up to $255,000. This would be
considered income and taxed as income.  However, the regulations
permit her to exclude from her income up to $250,000 profit from the
sale of a primary dwelling. So the maximum taxed income resulting from
the sale would be $5000.

In the exact words of the IRS in Publication 523 :

About 1/3 of the say down the web page:

"Excluding the Gain

"You may qualify to exclude from your income all or part of any gain
from the sale of your main home. This means that, if you qualify, you
will not have to pay tax on the gain up to the limit described under
Maximum Exclusion, next. To qualify, you must meet the ownership and
use tests described later...."

"Maximum Exclusion

"You can exclude up to $250,000 of the gain on the sale of your main
home if all of the following are true.

    *  You meet the ownership test.
    *  You meet the use test.
"Ownership and Use Tests

"To claim the exclusion, you must meet the ownership and use tests.
This means that during the 5-year period ending on the date of the
sale, you must have:

    *   Owned the home for at least 2 years (the ownership test), and
    *   Lived in the home as your main home for at least 2 years (the use test)."

There are complex ways to figure out what the actual value of your
mother's house is for tax purposes. This is called the "basis. " Since
she owns the house free and clear, she would probably use the actual
cost (plus original closing costs) as her "basis."  More on basis can
be found in the same page (near the top).

"Cost As Basis

"The cost of property is the amount you pay for it in cash, debt
obligations, other property, or services.

"Purchase.   If you buy your home, your basis is its cost to you. This
includes the purchase price and certain settlement or closing costs.
Generally, your purchase price includes your down payment and any
debt, such as a first or second mortgage or notes you gave the seller
in payment for the home. If you build, or contract to build, a new
home, your purchase price can include costs of construction....

"Settlement fees or closing costs.   When you bought your home, you
may have paid settlement fees or closing costs in addition to the
contract price of the property. You can include in your basis some of
the settlement fees and closing costs you paid for buying the home.
You cannot include in your basis the fees and costs for getting a
mortgage loan. A fee paid for buying the home is any fee you would
have had to pay even if you paid cash for the home."

Summing up, the taxes involved in the sale of your mother's house
would probably be minimal.


The other option that you mention is the gift of your mother's house
to your brother.

IRS Publication 950 covers the gift tax. (web page) (pdf document)

"Gift Tax

"The gift tax applies to the transfer by gift of any property. You
make a gift if you give property (including money), or the use of or
income from property, without expecting to receive something of at
least equal value in return. ..."

In your mother's case, the gift of her house to your brother, $11,000
in 2005 and $12000 in 2006 of the FMV of the house would not be
counted for tax purposes.

"Annual exclusion.   A separate annual exclusion applies to each
person to whom you make a gift. For 2004, the annual exclusion is
$11,000. Therefore, you generally can give up to $11,000 [12000 in
2006] each to any number of people in 2004 and none of the gifts will
be taxable."

After this tax free amount, however, a "credit" of up to $345,800 would be allowed.

"A credit is an amount that eliminates or reduces tax. A unified
credit applies to both the gift tax and the estate tax. You must
subtract the unified credit from any gift tax that you owe. Any
unified credit you use against your gift tax in one year reduces the
amount of credit that you can use against your gift tax in a later
year. The total amount used during life against your gift tax reduces
the credit available to use against your estate tax. " (page 3 pdf

(Presently, the lifetime credit a person can take is $1,500,000.  Any
credit taken in one year is subtracted from the lifetime amount. This
can be ignored by your mother as she has only the one asset.)

To sum up your mother's case: the entire FMV  of your mother's house 
would fall under the 12000 exclusion and the 345800 tax credit.  To
use a hypothetical example in your mother's case:

Let's say the sale of the house is  280,000.  

Subtract original price leaving     255,000

Subtract 12000 (exclusion)          243,000

Taking 243,000 in credit, tax is          0

Even though she will not owe taxes using the exclusion and the credit,
 she will have to file a Gift Tax Return.

From the pdf document  (page 6):

"Filing a Gift Tax Return

"Generally, you must file a gift tax return on Form 709 if
any of the following apply.

   * You gave gifts to at least one person (other than
your spouse) that are more than the annual exclusion
for the year....
   *You and your spouse are splitting a gift.
   *You gave someone (other than your spouse) a gift
that he or she cannot actually possess, enjoy, or
receive income from until some time in the future.
   *You gave your spouse an interest in property that
will be ended by some future event...."

Form 709 is available in pdf form (  ) Note the exclusion is
already included on Line 7. I include this 2005 form for information
purposes. You will have to get the 2006 form when it is published by
the IRS.

Form 709 instructions in pdf form
( ) Note that you have to
figure out the tax on the amount over 12000, but then you get a credit
reducing what is actually owed to zero.

The exclusion change from $11000 to $12000 is detailed here:

Federal Estate and Gift Tax Changes Coming in 2006: Annual Exclusion
Amount Increased to $12,000

Your mother might also like to arrange for either your brother or you
(or both) to assume power of attorney over her finances.  This would
mean her business decisions could be legally be made by one of her
children, relieving her of this responsibility.

" A Power of Attorney is a legal instrument that is used to delegate
legal authority to another. The person who signs (executes )a Power of
Attorney is called the Principal. The power of Attorney gives legal
authority to another person (called an Agent or Attorney-in-Fact) to
make property, financial and other legal decisions for the Principal.

 " A Principal can give an Agent broad legal authority, or very
limited authority. The Power of Attorney is frequently used to help in
the event of a Principal's illness or disability, or in legal
transactions where the principal cannot be present to sign necessary
legal documents..."

You may wish to have the power for just the one transaction of selling
the house (nondurable) or a longer lasting one  (durable)  that would
be effective for the lifetime of your mother.

"A "Nondurable" Power of Attorney is often used for a specific
transaction, like the closing on the sale of residence, or the
handling of the Principal's financial affairs while the Principal is
traveling outside of the country.

"A "Durable" Power of Attorney enables the Agent to act for the
Principal even after the Principal is not mentally competent or
physically able to make decisions. The "Durable" Power of Attorney may
be used immediately, and is effective until it is revoked by the
Principal, or until the Principal's death."

Power of Attorney

In summary, you can see from the above that either a sale of the house
or its gift to your brother would not result in a tax burden.  Perhaps
you should arrange to see another lawyer and CPA than the ones who
advised you.

For a lawyer referral here is the website of the Florida Bar Association:

The Florida Bar Lawyer Referral Service Online

And here is the website of the Florida Institute of CPAs (referral page)"

Online Directory: Personal Taxation

Web Search Terms:

"unified credit" gift tax
Florida Bar Association 
CPA Association Florida
Power of Attorney

I'd like to remind you that I am not an attorney or a CPA.  This
answer is the result of searching the web, mainly the official IRS web
site. I hope this is a start for your brother and you to make a
decision regarding your mother's assets.  I believe that you can
settle her financial problems so that her care will be provided for.

The best of luck to you and your family,


Request for Answer Clarification by lily1958-ga on 04 Jun 2006 06:12 PDT
Thank you so very much. I will be see an attorney who specializes in
these matters, I do have power or attorney over her finances and
medical. I am very pleased that there is a possibility that my brother
has a chance of aquiring the home we were raised in. And I feel so
much better that there is a chance of my mother not having a tax
burden. Now, as mention previously under the assumption that my
brother gets the house gifted to him and in returns borrows against it
$280,000.00 and gives the money to my mother will there be taxes she
would have to pay?  And is this legal, as far as you are aware of.
Again, thank you so very much. And I will be making an appointment
with a lawyer/cpa. Once again, thank you. I feel so much better.

Clarification of Answer by alanna-ga on 05 Jun 2006 18:30 PDT
Hi again lily1958-ga - 

Once again, I am not a CPA nor a legal expert on these matters. 
However,  it would seem that there are a number of other

        With what he has borrowed, your brother could pay your
mother's bills without any gift issue or tax issue being raised.
        He could also claim her as a dependent for his own tax
purposes. ( see )
        Your mother could put your brother's name on the title,
jointly with hers. He could then borrow as joint owner.
        As Principal (the one with power of attorney) he could borrow
on her behalf (in her name).  Then there would be no gift tax issues
to resolve.

It seems that there are many possibilities that do not involve a tax
burden. But I know you will be able to sort this out with your
legal/accounting experts.

I truly understand what you are going through.  It is difficult
dealing with an aged parent?moreso when she is so ill?and I know you
want to do the best thing for her.  I do think you and your brother
are on the right track.  Good luck.

Subject: Re: Gift tax and Capital Gain on a house
From: barneca-ga on 04 Jun 2006 10:23 PDT
To add to what I believe is alanna?s correct answer:

Something you did not ask, but might need to keep in mind when you
speak to your new attorney/CPA, is Medicare/Medicaid (M/M).  If you
were planning to have M/M pay some portion of your mom?s nursing
facility costs, I believe they base their contribution on her
financial situation.  She can?t give the house away for free and claim
poverty ? my understanding is, for the purposes of M/M?s contribution,
they assume she got fair market value for the house, or perhaps
something even more complicated.

Hopefully I used the phrase ?I believe? often enough to be clear that
I?m not positive about this.  My parents had to deal with all this
when arranging my grandmother?s care, but I was only peripherally
involved.  But depending on your plans, it might be one more thing to
discuss with an expert.

Finally, since you?ve already been given conflicting advice from your
attorney and your brother?s CPA, and seem somewhat fuzzy about their
answers, I suggest that rather than ask your question and accept
whatever you?re told, FORCE your new expert to explain to you, in
plain English, why what they?re telling you is true.  If alanna can do
so for $30, you have a right to expect clarity from someone charging
$300/hour.  I firmly believe that a professional that can?t explain
themselves to a layman is not worth whatever you are paying them. 
Ask, and ask, and ask until you understand and agree with them.

Best of luck.

Subject: Re: Gift tax and Capital Gain on a house
From: lily1958-ga on 04 Jun 2006 11:21 PDT
Thank you cab, for your input. I will be placing my mother in a
wonderful skilled nursing facility in Kansas, less then 1 mile from my
home. Reason for sell the home/or gifting it. I will be getting my
brother to assuming a loan for the $280,000.00, putting the house) up
which will go into an account for my mothers care (I am still looking
into that transaction making sure it is legal).  And there is another
situation. Since my mother has stage 5 of permanent kidney failure and
is on dialysis 3x a week, no  insurance company will accept her in
Kansas. Her present insurance company is Humana HMO. Once she leaves
the state of Florida and does not return after within the 12 weeks,
she will no longer be a member of Humana. Now since Humana Florida is
Licensed in Florida and is a hmo, the policy does not get transfer to
Kansas. There are Humana HMO in Kansas, but there are Humana PPO. But
she would have to apply and renial failure is considered
pre-exisiting. So no insurance company will accept her. So in other
words, she will have to pay the 20% out of pocket on all her medical
expense ( between the dialysis and meds the monthly bill paid by
insurance are around between $11,000.00 and $15,000.00. And this
amount is not including her hospital stay, which seems to be every 6
to 8 weeks)So her out of pockets cost could be approx. $3,000.00 per
month. In  other words she will have to exhaust all her finances, and
then claim poverty, so M/M kicks in.
I know I have given you more information then you want to know, but I
have been here in Florida with my mom since March 17, 2006. And I
don't have to any one who wants to speak about my mom health, and
sometime I don't know if I'm making the right decision. One thing I do
know is that she can not be alone in her home, and I will not place
her in a nursing facility here in Florida leaving her alone. Reason
for taking her home with me. And because of my job I can not take care
of her at my home. Plus it is really hard taking care of some who is
ill. I seem to make decisions based on emotion, and that is not cool
at times. Well thank you very much, she is calling me now.

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