Parents concerned about selling property to child due to capital gains taxes

The reasons for transferring ownership to children vary. Sometimes parents move out of their homes (or buy a second home), move away and want the home to stay within the family. In other cases, as parents age, they put their kids on title with themselves to make sure the home transfers to the kid once they die.

There are quite a number of different tax scenarios, but we’ll focus on two of them in responding to your question.

The first is the issue of paying federal income taxes or capital gains on the sale of the home from your parents to you. If your parents sell you the home for $120,000 and they have no profit on that sale, they won’t pay any capital gains or federal income taxes on the proceeds. In other words, if they sell the property for what they paid — even adding in the cost of any mechanical or structural work that was done — they won’t owe any taxes on the proceeds.

At the same time, your parents have effectively given you a gift of $120,000. As we just noted, for federal income tax purposes, your parents can each give you $15,000 without triggering any federal tax reporting or affecting any estate tax issues. Thus, your parents’ gift of $30,000 has no impact on you or your parents federal income or estate/gift tax returns.

The $90,000 would get reported to the IRS as a gift to you, but they would not have to pay any gift taxes on that amount. The gift tax form would just reduce the lifetime amount your parents can give you by $90,000 without paying estate and gift taxes. Currently, your parents can each give you $11,700,000 each, for a total of $23,400,000 during your lifetime without paying any federal estate or gift taxes.