Will my mother have to pay gift taxes?

Question

My mother and I agreed to go in together and buy a home and split 50/50. She paid her half in cash, $62,000.00, and I financed my half. The mortgage co. wrote her "half" as down payment, and labeled it "gift fund from mother". Is my mom going to have to pay gift taxes on this amount now? What if I "sell" the house to her, would that alleviate her from the gift tax?

Answer 1

As bostonianinmo said, the mortgage company documents don't really matter. The title is what is important. If both names are on the title, you should be fine. If only your name is on the title, I recommend consulting with and attorney to see if you can change the title and avoid any tax consequence. The sooner you do so, the easier it will be to convince the IRS that was your original intent. Worst case, she will have to fill out a gift tax return. If she has not used her unified credit, she can still avoid actually paying gift tax. This does reduce the amount of her estate that is exempt from taxes. That may or may not be an issue, depending on the size of her estate.

Answer 2

One additional point for the future.... who is living there one or both of you? This could have an impact on the Sec 121 exclusion of gain when you sell the house. The conditions are that you must have owned and lived in the home for 2 of the 5 years prior to the sale. That means if you live there and Mom does not, then her half of the profits will be taxable.

Also, re: gift tax, anyone can give anyone $12k per year with no consequence. Over $12k gift does not necessarily create a gift-taxable event. It does, however, create a "reportable" event, necessitating a gift tax return (form 709). Tax can be avoided by using some of the "unified lifetime" reduction in gift ( or inheritance). If Mom's estate is well under $2 million and her intent was simply to help you qualify for a loan on your home, then this might be something to consider to avoid tax on her half of the profit when you sell.

Another point to consider is who will take the deduction for mortgage interest & property tax? There are 2 conditions:

A: You must be liable for them (You both meet this condition, for if one does not pay his share the other could lose his interest to foreclosure or tax sale) &

B: You must have paid them. This is the tricky part. If you write all the checks, Mom CAN NOT deduct at all. I see people all the time who want to let someone else have the deduction . It does not fly unless both conditions are met.

Keep that in mind as payments are made, because after 12/31 of each year there's no changing the facts.

Answer 3

Hi Wanda, The first point is whose name appears on the title to the House, in other words Who owns the Home??, You, Your Mother or your Mother and yourself. If your not sure, sometimes they will list the owner by their Social security number, Check to see whose name and number the House is under. If your not sure, go down to the local Town hall and ask there, they will have the Info as to who owns the Home.
It doesn't matter what the Bank put down, what is important is your and your Mom's Intent. Is the $62,000 a loan to you, to pay back or it sounds like you both went into a Partnership and own this home jointly 50% each. If that is the case, Gift taxes are not an Issue. Your Mother put her half of the Purchase Price, $62,000 from an investment account that she owns. You contributed your $62,000 from a loan you borrowed. For all intensive purposes you each put in $62,000 in money, hers came from an Account she owns and your came as a Proceed from a Loan that you Borrowed.
If down the road, she wants you to own the Home 100% and its just you and her, She can Gift you her 50% equity in the House. if she does this as an annual Gift and Keeps the amount under the Maximum amount you can gift annually without paying Tax, The transaction will be Tax free.
She can still gift Her 50% at one time but she would have to file a Gift Tax return, use up part of Her unified tax credit, but most Importantly, WOULD NOT have to pay any taxes at a federal level. Depending on which state you live in, you might have some state issues, but your best bet would be to contact a CPA or a Tax Professional and Hopefully get the right answer!!!.
I say this because I'm a CPA and like any other profession have seen wrong answers being given to unknowing Clients.
Good luck, If I can help you,Please contact me, no Fee for Discussions, I believe in giving back.
Again, I'm assuming that a Gift was not your or your mothers intent. Some mortgage companies advise their clients to list money received from their Parents as a Gift or the Ratios come in too high as to the amount of money that your Borrowing.
In my opinion, this was not intended to be a Gift, but a Real estate Partnership, with you and your Mom as 50% Partners.

Good Luck, God Bless, Ken H

Answer 4

As long as both names are on the deed this won't be a problem. The mortgage company did that to expedite the loan processing in all likelihood.