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ERA Justin Realty brings helpful topics to Bergenite readers. Ron Darby, broker co-owner offers tips and hints about gifting the family home. The firm serves buyers and sellers in Bergen, Passaic, Essex and Hudson Counties and are celebrating their 62 years in area real estate.
ERA Justin Realty Report: Gifting The Family Home
“If you are getting ready to move out of your longtime home and into more sunshine, you can actually gift your home to a child or friend but that gift will come with a few strings attached. In many countries around the world, once the parents die, the children simply move into the home and take over the master bedroom. While that progression still occurs in the United States, estate taxes, home values, job transfers, and the desire for a separate space and different environment have changed the use of the traditional family home. The bottom line is that the home has evolved from basic shelter to the average person’s most valuable possession. It needs to be carefully protected, guarded, and even nursed along–much like the responsibilities that took place within the home itself. And the financial value is usually accompanied by priceless memories and experiences, making the family home beyond doubt the ultimate asset.” This is information brought forth by author Tom Kelly in his book “Real Estate for Boomers and Beyond,” reported ERA Justin Realty’s broker co-owner Ron Darby, his firm awarded for their commitment to excellence from approximately 30,000 ERA brokers and agents.
Darby stated, “First and foremost, your child or friend’s basis in the house will be what you paid for the property, plus major improvements. Because this cost you paid years ago may be lower than today’s home value, there’s a chance tax will be owed on a subsequent sale. Carefully note that tax laws change and everyone should review their specific situation with their tax advisor for the most current laws and tax information.”
Kelly’s book states, “For example, if you purchased your home in 1970 for $60,000 and it is now worth $450,000, your child’s basis would be $60,000 if you chose to transfer the home to the child as a gift. If the married child sells the home 10 years down the road for $760,000, their tax liability would be on $200,000 ($760,000 minus the $60,000 basis, minus the $500,000 exclusion for married couples). Taxpayers in the 15 percent tax bracket would thus owe the Internal Revenue Service approximately $30,000 in capital gains tax. The actual gain is the difference between the adjusted sales price (selling price less selling expenses) and the adjusted basis. The adjusted basis is the original cost plus capital improvements. Capital improvements are the cost of improvements having a useful life of more than one year. Examples include the new roof, dock, deck, remodeled bathroom, and finished basement. Generally, an expense is a capital improvement if it adds value to the property or extends its useful life. If these criteria are not met and the expenditure is considered necessary to maintain current usefulness, it is a maintenance cost.
The outright gift would also reduce your lifetime gift tax and estate tax exemptions. While the limits on both the lifetime gift tax and estate tax used to be the same (there was one overall exemption, and the individual used it up by making gifts during life and at death), the 2001 legislation set the gift tax and estate tax on different roads beginning in 2004. Both were combined into a ‘unified’ exemption because gifts made during life also counted against the total. The overall, or unified, exemption remains for the entire estate, but a gift exemption limits the amount that can be given during a lifetime. Once the unified exemption is used up, the tax rates that apply are quite high. The estate tax is being phased out over a 10-year period, but the gift tax will remain in place. The gift tax exemption is $1 million in 2006, but the estate tax leaps to $2 million. In future years, the gift tax exemption will remain at $1 million, while the estate tax exemption rises until the estate tax is fully repealed in 2010. At that time, the top gift tax rate again will equal the top income tax rate.
If you are going to gift your home to an individual, it’s best to offset the amount by first using your annual gift tax exclusion of $11,000 per gift. You can gift $11,000 (this amount will rise and is tied to inflation) to any one person in any year. Hence, if you and your spouse each make a gift to both your child and her spouse, you can offset $44,000 of the home’s value. Then, as long as the home’s net figure is less than $1 million, you won’t owe any current tax (unless you made substantial gifts earlier that reduced your remaining exemption).”
Darby concluded, “Tax regulations do change, so take the time to check with your tax attorney or your accountant before making any moves. Be certain that goals are shared and discussed. You’ll find it saves time, money and anxiety.”
ERA Justin Realty proudly received the prestigious ERA 2003 through 2011 Commitment to Excellence Award, from approximately 30,000 ERA real estate brokers and agents. For these reasons ERA Justin Realty should be your buying and selling Realtor of choice.
All of the ERA Justin Realty listing and sales professionals can be reached at either of their two Rutherford offices at 118 Jackson Avenue and 57 Park Avenue, by office phone (201) 939-7500, (201) 438-0588 or (201) 438-SOLD. Also view 1000’s of homes at their websites at www.ERAJustin.com, www.ERAJustinRealty.com and www.SellBergenCounty.com.
