If My Parents Gift Their Home to Me, Do I Have a Tax Liability?

by Gregory Hamel, Demand Media

    They say it is better to give than receive, but when it comes to taxes, the old saying has it backwards. You can give and receive small gifts without any negative tax implications, but gifts of significant value, like a home or vacant land, can result in tax liability. In general, gift givers face the burden of gift-related taxes, but you might have other tax liabilities if you receive a home as a gift.

    Gift Tax

    The Internal Revenue service uses the gift tax as a means of preventing people from giving away all their wealth to avoid estate taxes when they die. According to the IRS, when you give a gift that exceeds $13,000 in value in one year, the excess is subtracted from a $5 million "unified credit." If you use up your unified credit by giving too many large gifts, additional gifts are subject to gift tax. After you pass away, any remaining unified credit can be applied to the assets in your estate to exempt them from estate taxes. When your parents give you a home, they are going to use up part of their unified credit, but you don't owe any gift tax yourself. The IRS says that under special arrangements, you can agree to pay gift-related taxes on behalf of the giver.

    Real Estate Tax

    Even though you may not have tax liability at the time you receive a home as a gift, homeowners usually have to pay real estate taxes to state and local governments. After you take ownership of your parent's home, you are responsible for paying regular property taxes due on the property. You may owe additional taxes in the form of special tax assessments if the government makes infrastructure improvements that affect only your neighborhood.

    Selling Property

    If you sell property that you receive as a gift, you have to pay taxes on the difference between the original value of the property and the sale price. For example, if your father buys an asset for $50, gives it to you and you sell it for $200, you owe taxes on the $150 capital gain. You can, however, exclude a large amount of the proceeds from a home sale from taxation if you meet certain ownership and use tests. The IRS says that if you used a home as your primary residence for five years, you can exclude $250,000 in capital gains from taxation. The exclusion is $500,000 for married couples, so long as both partners meet the use tests. You can't take the exclusion for a home sale more than once every two years.

    Considerations

    When you receive property as inheritance from an estate, your cost basis in the property -- the amount that is used to calculate any capital gains -- is the market value of the property at the time you inherit it. When you receive property as a gift, your basis is the original amount that was paid for the property by the giver. A higher cost basis results in lower tax liability, because capital gains equal the sale price of an asset minus your cost basis. This means that getting a home as inheritance from an estate is usually preferable to getting it as a gift from a tax standpoint, because current market prices are likely to be higher than the amount the donor originally paid for the home. If you get a home as a gift and sell it, you could owe taxes on decades of capital gains. When you inherit a home, gains that occurred before you take ownership of it are erased for tax purposes.

    About the Author

    Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.