Q: Both my name and my son's name are on a deed for a home I purchased for him. I paid cash so there is no mortgage. I was considering removing my name from the deed since my son got married recently, and I'd like the deed to be in his name only so he could have the option to add his wife to the deed or include a survivorship clause. My question is: Would I have to pay a gift tax for the quitclaim deed? I'm retired and my only income is Social Security. —Sandy, Warren, Ohio
A: When you remove your name from the deed and transfer sole ownership of the home to your son, you will need to declare the home as a gift -- but that doesn't mean you'll face a tax bill.
Currently, every taxpayer can gift up to $14,000 annually per person without needing to report the sum to the IRS. Any gifts above that limit must be reported to the IRS on Form 709 United States Gift Tax Return.
But simply reporting the gift doesn't trigger a tax bill. Current law allows every person a lifetime gift and estate tax exemption of up to $5.45 million, explains Portage, Mich., financial planner Charles C. Zhang. The value of the home will count toward that limit, but unless it's an extremely expensive house, it probably won't exceed it. Ultimately, your estate would owe taxes only if the total value of all the gifts made during your lifetime (including the house), plus any assets you leave behind, exceeds that $5.45 million threshold.
In any event, you will not pay any tax personally, Zhang says, because the total value of your estate and gifts won't get calculated until your final estate tax return is filed -- that is, after your death.
Unless you filed a Form 709 when you initially added your son to the deed -- thereby gifting him half the home's value -- Zhang suggests that, when you file a Form 709 now, you declare the full value of the home. You get to reduce that amount by the annual gift exemption of $14,000, he notes.
So, for example, if the home has a current market value of $300,000 and you transfer ownership this year, you would report a gift worth $286,000 -- which in turn would reduce your remaining estate tax exemption from $5.45 million to $5.164 million. You'd still have plenty of room to give or leave behind assets before your estate would owe any taxes.