What should I be aware of if my mother gifts me her 50 percent equity in a home and I’m buying the other party out of their 50 percent?

by Nathan A. DeFilippi, CPA | Oct 31, 2018
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My mother has recently been given 50 percent of a house due to a death in the family. My mother is considering gifting me her 50 percent, and I'd then buy the other party out of their 50 percent of the house. Is there any concern with my mother gifting me her equity in the home?

When real estate is received as part of an inheritance (as is assumed in this scenario), the general rule, which is usually favorable to taxpayers, is that the recipient’s basis for inherited property is stepped up (or stepped down) to the asset’s fair market value at the decedent’s date of death. This step-up in basis minimizes the capital gains tax liability if the inheritor later decides to sell the property.
 
Since the property is subsequently being gifted to you from your mother, you will receive “carryover basis” at the date of donation, which is the same as the donor’s cost basis. There is no step-up in basis for the gifting of real estate. This carryover basis will be your cost basis in the property if you choose to sell the property in the future.
 
With regard to your mother gifting her share of the property to you, she will be responsible for filing a gift tax return to report the value of the gift. She will use up her 2018 annual gift exclusion of $15,000, and the remainder will reduce her lifetime gift tax exemption of $5.6 million ($11.2 million if married). She is unlikely to pay any gift tax on the gift, but she is required to properly report the gift on the gift tax return. You are not responsible for reporting the gift received until you choose to sell the property, at which time you are responsible for reporting and paying capital gains tax on any gain.

Please note that the gifting/capital gain applies to the 50 percent ownership between you and your mother only.

There are many variables to consider and I suggest that you seek professional tax help. For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Nathan A. DeFilippi, CPA, is a senior tax associate with H2R CPA in Pittsburgh.

Disclaimer
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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