Dear Mr. Premack: My mother owns her own home, and my wife and I have been caring for her in that home for several years. A few weeks ago she started talking about putting title to the house in our names. We are open to the idea, even eager to own this house. I understand that if she gives the house to us now, it may help avoid probate when she dies. We like the upside of owning the house and staying out of court. Are there any downsides to the idea of her giving us title to the house now? – R.B.
Transferring ownership of her house to you now creates a number of legal issues. I’ll set them out, and then she and you can weigh the factors to decide whether to proceed or hold back on the transfer.
First, you don’t mention whether your mother’s house has a mortgage or is free of lien. If there is a mortgage, the contract she signed may (and probably does) include a “due on transfer” clause. She will have to seek permission from the mortgage lender to transfer title, and failing to do so would be construed as default that could subject the house to foreclosure. Even if they give permission, they may first ask you to qualify on the same loan or to refinance. If the house if free of lien, there are no such restrictions.
Second, consider the federal gift tax issue. Your mother, like all of us, has two gift tax exemptions. The first is her annual allowance – authorization to gift up to $13,000 per year, per recipient, without even reporting the gift to the IRS. Assume for a moment that her house is valued today at $120,000. She can gift $26,000 of its value to you and your wife. The balance, $94,000, is a taxable gift. This is where her second allowance would be used – she is authorized to gift up to $5 million in value without paying gift tax, so long as she reports the gifts to the IRS. Bottom line: if she gifts the house she will have to file a form 709 with the IRS, but will not have to pay any tax.
Third, consider the capital gain tax issue. If she gifts the house to you, then you as owners have the same tax basis that she had. Assume she purchased the house for $90,000 and today it is worth $120,000. If she gifts it to you and then you sell it (without establishing that it is your tax homestead) you’ll have to pay about $4,500 capital gain tax on the difference between her basis and the sales price. To avoid this tax, you can either a) establish that the house is your tax homestead before you sell by living there for two out of five years while you own it, or b) opt to wait, receive title by inheritance instead of gift, and get a free step up in basis on the house. Bottom line: if she gifts the house to you, it may (or may not, depending on your choices) increase your capital gain tax when you sell the home.
Fourth, factor in the local property taxes. I’ll assume your widowed mother is 65 or older. Her local property taxes are reduced due to her 65+ exemption and her school tax freeze. If she gifts the house to you, the local property tax that is paid every year may double or triple in amount. If she continues to own the house until her death, the taxes stay at their current level until you inherit the house and then they rise.
Fifth, understand that if she transfers title to you and later needs to go to a nursing home, the transfer will likely disqualify her from receiving Medicaid benefits. If she cannot afford to pay for the nursing home on her own, the fact that she gave you title to the house may mean that the government will refuse to help pay for her care. There are complex exceptions to this rule that you can view on my website at www.Premack.com.
Finally, understand that a gift creates separate property interests under Texas marital property law. If she gifts the house to you and to your wife, each of you will have a one-half undivided interest as separate property, not community property. This has negative tax consequences under federal law, but can be repaired with proper estate planning for you and your wife by a qualified Elder Law attorney. There is also a major alternative to facing all these issues – one that cures all the problems – which I’ll write about next week.
Paul Premack is a Certified Elder Law Attorney practicing estate planning and probate law in San Antonio.
Original Publication: San Antonio Express News, February 6, 2012