Your father may owe gift tax when giving you a house, but you don’t owe any taxes except possibly when you sell the house. There are exceptions permitting both of you to avoid owing tax. The path for limiting the tax impact is paved with knowledge of the types of taxes, who pays them and how they are incurred.
Your father is responsible for paying any gift tax due. A recipient does not owe tax on a gift. Donors pay gift tax. Recipients only pay income tax for receiving something of value in an exchange. Gift tax is owed by an individual who transfers property and receives nothing in return—or receives less than the fair market value of the transferred property. So a gift has also occurred if you provide something to your father for the house that’s doesn’t have an equal value.
Your father has also given you a taxable gift if he’s merely permitting you to use the house or receive rental income from it. For example, it’s a gift if you receive a right to live in the house that reverts to your father or someone else he names when you move or die.
Gift tax is combined with estate tax in the same tax code section. Your father is taxed on the combination of gifts during his lifetime and property left to heirs after his death. However, he is granted a lifetime tax exclusion amount. This is a unified credit that applies to both gift tax and estate tax. He subtracts the credit from any gift tax owed when filing a gift tax return with the Internal Revenue Service. By using some of his tax credit when giving you a house he has a reduced credit available for excluding his estate from tax upon his death.
Your father is exempt from owing tax on any gift with a value that’s less than the IRS annual threshold. As of 2013, there is a threshold of $14,000 to any person during a calendar year. This is the amount of annual exclusion from gift tax. It is adjusted each year for the cost-of-living. No gift tax is owed if your father gives a house with less value than the annual exclusion.
By gifting only partial ownership in a house over several years, your father can remain below the annual exclusion from gift tax. This requires him to give you a percentage of ownership each year. To stay below the exclusion amount, the fair market value of the house is required. The tax code defines fair market value as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”
If You Sell
You owe capital gain tax when you sell the house for more than the cost basis. As a general rule, your father transfers his cost basis to you. However, your taxable gain also depends upon the market value of the house when it’s given to you. On the gift date, you should obtain the figures for your father’s cost basis and the fair market value. You increase your basis by any gift tax paid. If you make the house your primary residence for a period of two out of five years before selling it, you can exclude $250,000 of gain from tax.
- Internal Revenue Service: Frequently Asked Questions on Gift Taxes
- Internal Revenue Service: Publication 950 Introduction to Estate and Gift Taxes
- Internal Revenue Service: Publication 551Basis of Assets
- Internal Revenue Service: Instructions for Schedule D
- Internal Revenue Service. "Frequently Asked Questions on Gift Taxes." Accessed April 30, 2020.
- Internal Revenue Service. "2019 Instructions for Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return." Page 8. Accessed April 30, 2020.
- Internal Revenue Service. "2019 Instructions for Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return," Page 3. Accessed April 30, 2020.
- Internal Revenue Service (IRS). "Publication 559: Survivors, Executors and Administrators: Estate and Gift Taxes." Page 26-27. Accessed April 30, 2020.
- Internal Revenue Service. "What's New - Estate and Gift Tax." Accessed April 30, 2020.
- Internal Revenue Service. "Estate and Gift Tax FAQs." Accessed April 30, 2020.
- Federation of American Scientists. "Recent Changes in the Estate and Gift Tax Provisions." Page 1. Accessed April 30, 2020.
- Center on Budget and Policy Priorities. "Ten Facts You Should Know About the Federal Estate Tax." Accessed April 30, 2020.
- Internal Revenue Service. "Instructions for Form 706: Time for Payment." Accessed April 30, 2020.
Brian Huber has been a writer since 1981, primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. He has a Bachelor of Arts in economics from the University of Texas at Austin.