I have an adult disabled son who receives no govt. aid & works at a low-paying job. I would like to increase his financial security by giving him a rental condo that I purchased in 2013 & currently rent out for a sum that exceeds the mortgage payment. I want my son to take over full ownership of this condo, receive all the rent & also be financially responsible for all the condo costs, such as property taxes & upkeep. The down payment on this $90K condo was $20K. Can the gift of this condo to my son count as my $14,000 IRS gift exemption? How do I transfer ownership of this condo to my son? Must he qualify for his own mortgage, & if so, would the fact that the current rent on the condo covers the loan payments help him get approved? He has $25K in an IRA. Or should I cosign the loan?
Dealing with the gift tax question, you have an annual gift tax exclusion of $14,000 per year. Additionally, you have a lifetime maximum gift tax credit of $5.25M (in 2013).
However, gift tax isn't the only issue. Depending on your adjusted basis in the condo, because there is a loan, you might recognize some gain on the transfer to your son. The amount realized from a sale or other disposition of property includes liability from which the transferor is discharged. Reg. §1.1001-2(a)(1) Thus a gift of encumbered property is treated as a bargain sale. Estate of Levine v. Commissioner, 634 F2d 12.
Assuming that the fair market value of the condo is $90,000 and the total amount paid toward the condo is $20,000, and further assuming that you have not taken depreciation on the condo (you really should have) which would decrease your basis, and that you have not made any capital improvements which would increase your basis, you have an adjusted basis of $90,000 in the condo. Additionally assuming that the outstanding mortgage is $70,000 and your son takes the property subject to the mortgage, you would not recognize a gain and your sone would take a basis in the property of $90,000. If your adjusted basis were less than the amount of the mortgage, you would recognize gain on the difference.
Then moving on to the gift tax consequences, given the facts above, the gift amount is the difference between what your son pays and the fair market value of the property. Since the amount your son is paying is $0, the gift amount is the fair market value of the property.
Therefore you would have to file a gift tax return, for the amount of $76,000 ($90,000 - $14,000) which exceeds the annual exclusion.
There are likely much better ways of accomplishing the same thing. I recommend that you consult with an estate planning attorney, particularly one that is very familiar with planning for children with special needs.
This content is not legal advice and it does not create an attorney client relationship. This content is provided for educational purposes only. If you need answers to specific legal problems, please engage an attorney. This content is not intended or written to be used, and cannot be used, for the purpose of avoiding federal tax penalties.
General Practice Lawyer
Talk to your accountant about thee issues.
In no way am I offering you legal advice, and in no way has my comment created an attorney-client relationship. You are not to rely upon my note above in any way, but insted need to sit down with counsel and share all relevant facts before receiving fully-informed legal advice. If you want to be completely sure of your rights, you must sit down with an experienced criminal defense attorney to be fully aware of your rights.
This is an accounting question, not a legal question.
The information provided in this answer does not create an attorney-client relationship and is not considered to be legal advice. Mr. Leroi answers questions on Avvo because he strongly believes in public service from his years as a judge, magistrate, and prosecutor. If you need to ask any follow up questions because my answer did not fully address your question, feel free to call Chris or post an additional question. Thank you.
Family Law Attorney
The loan documents you signed with the lender likely have provisions that the lender will have the right to demand full payment if the ownership of the property changes. Transferring the ownership of the condo to your son would be a change in ownership.
If full payments continue to be timely made, perhaps the lender would not care to exercise its right to demand full payment.
Because there is a mortgage on the property, you will have to pay real estate excise tax if you transfer the property to your son. The real property excise tax is about 1.7% of the "sales price" which in this case would be the outstanding balance on the mortgage.
Depending on how your son is disabled, he may not be able to take care of himself financially. If he owns the condo, he can sell it. You may not want that to happen.
If there is no rush to transfer the property all at once to your son, perhaps you can slowly transfer the property to him so that you can use the annual exemption amount for several years.
There may be other issues that you have not thought of.
You should review the specific facts with your attorney to find out your legal options.
First, for any gift tax return questions you should consult a CPA who can prepare the fairly simple gift tax return form.But more importantly, you or your son should consult an elder law/disability law attorney regarding this gift. That attorney may help by establishing a Special Needs Trust to protect the condo (and other assets). Depending on his age and other factors your son might also qualify for certain government benefits and his IRA might even be placed in a so called "d4A" special needs trust to allow him to benefit from the IRA but also qualify for governent programs. You can locate an appropriate elder law/disability attorney by going to www.waela.org. Good luck with this.