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Situation: Daughter owns a personal residence with an outstanding mortgage. She has a father that has lived with her for more than two years. She wants to retitle the house into joint tenancy with her father.
It looks like a gift tax return will need to be filed, whereby the daughter's father will acquire half of the daughter's cost basis in the house. The father will be taking over half of the mortgage. If this transfer is done, the daughter would qualify for the Section 121 offset on the gain on her 50% share. The dad would not qualify, because even though he lived there for two years, he didn't own it for two years.
My question is the assumption of half of the mortgage. I would think that for gift tax purposes, the taxable gift would be half of the fair market value less half of the mortgage that is being taken over. Because this is a present gift, the annual exclusion can be offset against the amount. The rest would be offset by the million dollar gift tax credit (tax credit equal to a million dollars of taxable gifts).
One person in my office is adamant that there is a gain to recognized by the donor for the assumption of the mortgage by her dad. While I have seen assumption of mortgages to be considered boot in 1031 exchanges, I can't find anything that says this is a taxable transaction.
Does the daughter have to recognize a gain on the amount of the mortgage that her dad assumed?
Thanks in advance.
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I'm sorry. When I bring up the Section 121 offset, I'm referring to if the property was to be sold immediately. Obviously the Section 121 amount does not come into play for the transfer of part of the property to the other joint tenant.
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Power Member
Group: Forum Members
Last Login: 2/16/2010 6:30:43 PM
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| I think it depends on the basis of the property vs the amount of the loan assumed. If Dad was receiving property with a FMV of 300,000 and a debt of 160,000 - the gift would be $140,000. If daughter's basis in the house was 200,000 - she would have a taxable gain because the reduction in debt would be treated as a cash payment to her. Basis given up would be 100,000 and debt forgiven would be 160,000 so she'd have a gain of 60,000. Look up part gift/part sale to find refernces to this. I'm doing this off the top of my head so it could be slightly out of whack.
Mary Kay Foss
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