I have a home which I would like to transfer to my niece as gift, what are the tax consequences or better way?

Question

The single family house is primary residence bought at $260K with $50K down. Current market price is approximately $390K or more. Is it better to transfer now as a gift or place it in my will as inheritance with deed/trust for my niece to avoid taxes on me. I know I am entitled up to $250K income for sale of primary residence, but my niece just came from a foreign country and working as a nurse for two years. She recently got married and now has a family of her own. She has no enough savings to purchase the house at market value and I would like to sell or transfer the house to her at cost or loan balance of $190K. What are the repercussions on me regarding the equity gift? Can I sell it at cost of $260K to her, below the market value with no penalty? Please advise. Thank you.

Answer 1

Is she a citizen? that changes some rules. If she is not a citizen make sure you tell the attorney involved in the process this as it can be very very important.
if your goal is to avoid taxes and you dont need to spend down for medicare it is probably best for you to pass it in a will as she will get the step us basis in the property and won't have to pay gain. Unless you are near the estate/gift tax limits then you should definitly consult wiht your attorney on this matter as well as without 100% info it is impossable to tell

Answer 2

Note that gift tax (if any) would be based on current fair value and Person A would have to file IRS form 709. But Person B's cost basis would be Person A's cost basis of $90,000 (plus improvements) when B eventually sells it. So if it was currently worth $200k and B immediately sold it for that (without living in it for 2 years), B would owe tax for $110,000 capital gain. If Person B inherited the property instead, cost basis would be stepped up to fair value at time of A's death, so capital gain would only apply to gain above that (which would be nil if sold at that time).

Answer 3

The balance on your mortgage is meaningless for tax purposes. If you sell to a relative for less than market value, you must consider the difference a gift. All gifts off more than $12,000 from any individual to any other individual in one year requires a gift tax return to be filed. If both you and your niece are married, both you and your spouse can give her and her husband a total of $48,000 without gift tax consequences.You could sell her the house for $390,000 and take back a $130,000 mortgage. Then you can 'give' $12,000 worth of 'payments' on the loan each year until it is paid off. This does require you to declare interest on the loan as income.