It’s not uncommon for a property owner to add the name of another person — a significant other, a spouse, a child or a parent — to a deed. Just this week a client asked me about doing this – his motivation was to save on death taxes. He was correct that doing so has tax consequences. What he did not realize was the scope of the tax and other consequences both immediately and many years down the road.
Pennsylvania Inheritance Tax Giving someone else and interest in property can avoid Pennsylvania inheritance taxes. Provided that the donor survives for one year following the transfer date, the value of the property will not be subject to inheritance tax. The tax savings depends on the relationship between the donor and donee. Inheritance tax to lineal descendants (e.g. children) is 4.5%, to siblings is 12% and to all other persons is 15%. Thus the donor’s estate could save up to 15% on the value of the property in inheritance taxes.
Capital Gains Tax The decision to gift or not usually involves a balance between the death tax and capital gains tax implications. When you give away your property, the tax basis (or the original cost) of the property for the donor becomes the tax basis for the donee. For example, suppose you bought the property years ago for $50,000 and it is now worth $200,000. If you give the property to your children, the tax basis will be $50,000. If the children sell the property, they will have to pay capital gains taxes on the difference between $50,000 and the selling price. Capital gain tax rates vary depending on the length of time the asset is held and the seller’s ordinary income tax bracket. In our example the inheritance tax savings would be $9,000 ($200,000 x 4.5%). The capital gains tax, assuming your children are in the 20% bracket, is $30,000 ($150,000 gain x 20%). The capital gains “hit” is far more than the inheritance tax savings.
The only way for your children to avoid the taxes is for them to either live in the property and never sell it or live in the property for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a married couple) of their capital gains from taxes. For many people, it is unlikely that their children will end up moving into the property, especially if the children are not local. Inherited property does not face the same taxes as gifted property. If the children were to inherit the property, the property’s tax basis would be “stepped up,” which means the basis would be the current value of the property. However, the property will remain in your estate, which may have inheritance and (for persons with estates in excess of $5,430,000) federal estate tax consequences.
Federal Gift Tax Giving someone else an interest in one’s property — without being paid for it or receiving something of value in return — constitutes a gift and could trigger the need to file a federal gift-tax return. Under current federal tax law, an individual can give another individual who is not a spouse no more than $14,000 in a calendar year without having to file a gift-tax return. If a husband adds a wife’s name to a deed that is in his name only, there is usually no necessity to file a gift-tax return. Current tax law exempts from taxation the first $1 million in gifts made over a lifetime. The conveyance still has tax implications because the amount of the reportable gift reduces the amount that can pass tax-free through the donor’s estate.
Other Considerations Beyond the tax consequences, gifting property to children can subject the property claims of your children’s spouses in the event of a divorce and their creditors. In addition, it can affect your ability to be accepted into a personal care facility and eligibility for Medicaid coverage for nursing care. Another big question is will you will have enough money to continue your life style? These considerations are beyond the scope of this article but are equally important to the tax implications.
There are other options for giving your house to your children, including putting it in a trust or selling it to them. Before you give away your property, consult an estate planning or elder law attorney, who can advise you on the best method for gifting your property.
Welch, Gold, Siegel & Fiffik P.C. regularly provides estate planning services to clients across the Commonwealth of Pennsylvania. Please call us at 412.391.1014 and ask for a member of our estate planning team: Michael E. Fiffik, Esquire, Jennifer L. Bamonte, Esquire or Marsha Maietta, Esquire.