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Real Estate Matters: No need for quitclaim deed to avoid gift tax on vacation home

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By Ilyce Glink and Samuel J. Tamkin
Friday, November 12, 2010; 9:38 PM

My husband's parents bought lake property 48 years ago for approximately $15,000. Today it is valued at about $600,000. His mother is still living but is in a nursing home and does not use the cottage.

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We have been told that a quitclaim deed signed by her today would give us the cottage with no tax consequences (gift or capital gains). Is this possible? Would putting my husband's name on the deed as co-owner attach any gift-tax liability? Is there any way for him to receive the property without some sort of tax issue for either him or his mother?

Your mother-in-law has the right to gift the home to your husband. Federal income tax and gift tax laws would allow your mother-in-law to give the home and not pay any taxes. Likewise your husband could receive the home and not pay taxes. Your mother-in-law might have to fill out gift-tax forms relating to that gift to her son, but the $600,000 value is well below the limit allowed by the federal tax code before she would have to pay gift taxes. (As of 2010, a person can give gifts in value of up to $1 million total before having to pay the federal government taxes on the gifts.)

As an aside, in 2010 a person can give a gift to anybody of up to $13,000 a year without that amount being included in the amount considered for taxation by the federal government.

If your mother-in-law gifts the home to your husband, his basis for the home will be approximately the amount his parents paid for the home. Conceivably that amount could be $15,000 but might also depend on how your in-laws held title to the property, when your father-in-law passed away and what the value of the property was at the time of his death. But for simplicity's sake, let's assume that your husband's basis when he becomes owner of the property is $15,000, and let's assume that the family never put any capital improvements into the home.

At that $15,000, if you and your husband sell the home, any sales price above the $15,000 would be considered long-term capital gains if you hold on to the home for at least one year.

Estate tax laws are in flux at the moment, but in prior years if your husband inherited the property from his mom, he would have inherited the home at the home's value at the time of his mom's death. Under the old law - and perhaps if Congress changes the law back to the way it was - if you inherited the property and then sold it, your mother-in-law would not have paid any income or capital gains taxes on the sale of the home and neither would your husband.

Because of the changes that have occurred and might still occur in the tax laws relating to estates, the best course of action would be to sit down with an estate attorney to start making plans on how to handle title to the property now and plan for any tax consequences in the future.

I am a 68-year-old retiree, and my income is only $860 a month. I am planning to buy a condo for $68,000 and to use $35,000 from my IRA as a down payment. Is this a wise move? The rental rates right now are about $695 a month.

Good question. The first thing you have to consider is the significant amount of federal income taxes you might have to pay if you withdraw $35,000 from your IRA. If you're in a low federal tax bracket and don't pay much in federal income taxes, the withdrawal could bump you up, as the $35,000 will be considered additional income. You may end up paying $5,000 or more in taxes as a result of the withdrawal.

If you plan to obtain a loan for the balance of the cost of the condominium, you could find that you won't benefit much from the low remaining loan balance. You may wind up having to pay several thousand dollars to get that loan.

If you have to pay $3,000 for the loan and end up paying $5,000 in additional federal income taxes because of the withdrawal from the IRA, will those payments have a negative impact on you? Do you have the cash available to manage those payments? Would the purchase still make sense for you?

In order to compare the cost of renting with the cost of owning this condominium, you will need to know what the monthly condominium assessments and the annual property taxes will be. Let's say you find out that the assessments will be $250 a month and the real estate taxes on a monthly basis will end up being about $150. Your monthly mortgage payment might be about $125. Altogether, those payments will cost you about $525 a month, saving you about $170 a month over the cost of renting.

Although there are some savings, you also have some additional costs associated with the purchase, including the move and any other costs relating to owning a condominium. When the dishwasher breaks, for example, repairing it will come out of your pocket.

You also need to determine whether you will need the IRA money in the future for your expenses. If that money is now earning dividends or interest, or if it's invested in stock that's not likely to lose value, your IRA money could continue to grow.

If you decide to buy the condominium, you had better review the finances of the condominium association before you sign on the dotted line. If the association's finances are weak, and it ends up having to spend money on building improvements, those costs could come back to haunt you in the form of a special assessment.

If those costs are significant, the low purchase price of the condominium might not outweigh the additional expenses you end up paying to keep up the building. Remember, if you rent in a building, you usually aren't responsible for repairs or capital improvements. The landlord can raise your rent, but you can always move to another building.

You'll have to review all of these costs and determine whether the move is right for you. You may decide the new place is what you want and need, and that you can go ahead and do it.

Ilyce R. Glink is an author and nationally syndicated columnist. Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink's Web sites, at www.thinkglink.com and www.expertrealestatetips.net.


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