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| The Basics | Hey Jeff, who pays the tax on a $60,000 gift?
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Nobody, if you follow the IRS rules on gifts carefully. Plus: How to ensure you keep all the profit when you sell your home.
By Jeff Schnepper
Question: My aunt has $60,000 she wants to give me to buy a home. Its great she wants to help, but I have three questions: - Can she give me that much as a gift without any tax to be paid on her part? This would be a one-time gift.
- Will I have to pay any taxes on it?
- Would it be better to set it up as a loan from her?
Answer: Your aunt, or anybody, can give as much as $11,000 per recipient per calendar year without even having to file a return. If youre married, she can give another $11,000 to your spouse. Between now and Jan. 1, 2005, as much as $22,000 can be gifted with absolutely no tax consequences, $44,000 if we count your spouse. If your uncle joins in, thats as much as $88,000.
Alternatively, she can gift you the whole amount at once and use part of her $1 million lifetime exclusion to shield the difference from gift tax. But since she would exceed the $11,000 per year annual exclusion, she would have to file a gift tax return on Form 709. (You can download the form here.) Its an easy form to complete, especially for cash gifts. Shouldnt take more than 30 minutes to do. A tax professional can fill it out in about 10 minutes. If your aunt doesnt expect to have an estate in excess on $1 million, thats the way Id go.
On the last two questions, the answers are simpler:
Youre in luck. Theres never any income tax to you on the receipt of a gift. All the money, regardless of the amount, comes to you income-tax free.
I would not take the money as a loan. Youd have to pay interest, and the interest income would be taxable to your aunt. Besides, youd have to pay back your aunt, and that would deny her the joy of helping you buy your house!
Can I write off my home office if my house is paid for?
Question: I work from my home, using 30% to 40% of my space for my business. I have two questions about the deductions I can take as a result. - What can I deduct if the mortgage is all paid off? If the house was not paid off, then that percentage of mortgage interest could be written off. Since I have paid off the mortgage, cant I write off the percentage of the value of the house -- like rent?
- If I write off my home office, will I get killed on taxes when I sell the house? People used to tell me that the Internal Revenue Service will come back and bite if you sell a home that you used partly for business.
Answer: Whether or not you have a mortgage really isnt directly relevant. You start with the amount of space used regularly and exclusively for business. Lets assume thats 20%. If so, then 20% of your interest and taxes paid would be allowed as a business deduction.
But, Im sorry to tell you, if you dont have a mortgage, you can only deduct the real estate taxes paid. You get no deduction for what tax people might call deemed rent.
You can depreciate 20% of the building cost (net of land). That depreciation would be over a 39-year period. If you paid $300,000 for your house (net of land), the depreciation for the office space would be worth $1,538.46 a year on a straight-line basis.
(For more on property depreciation, check IRS Publication 946.)
It's best to claim the deduction on Form 8829, then carry the deduction over to your Schedule C.
Theres a big advantage of deducting the taxes and interest on Schedule C, rather than as itemized deductions on Schedule A. The Schedule C deduction also reduces your liability for Medicare tax and, potentially, Social Security tax, as well as income tax. You also have the possibility of deducting the business part of the taxes and interest in addition to taking the standard deduction (if greater than your itemized deductions).
And what about the IRS tax bite when you sell? Its there, but its not nearly as bad as you might think.
When people told you the IRS would bite when you sold the house, they were talking about the old rules. Under prior law, if you used 20% of your home as a home office, then 20% of your gain would always be subject to capital-gains tax. Under the new regulations, only the amount of depreciation taken after May 7, 1997, to the extent of gain, is subject to tax. That amount is taxed at a 25% rate.
Say you sold your house for a $500,000 gain and had $30,000 in depreciation taken after May 7, 1997. Under the old rules, assuming a 20% business use, youd pay tax on $100,000. Under the new rules, the maximum that would be subject to tax would be the $30,000.
A little time pays on sheltering profits on a home sale
Question: I know youre supposed to live in the home for two of the last five years before a sale if you want to exclude any home sale profits from tax. But Ive read that a homeowner can claim two years residency in a house even though hes had to rent it out until his first house sold. Is that right?
We bought a townhouse in April 2001, expecting to sell our first home quickly. But we couldnt find a buyer, and, that summer, we rented the townhouse out for a year. Our first home finally sold in March 2002, but the lease on the townhouse prevented us from moving into our new home until the following Nov. 15.
We plan to move again, possibly in early October, because my husband has some health problems. This means that we wont have actually lived in our townhouse a full two years; we expect to be short somewhere between four and six weeks. The townhouse is on the market, and we may get a contract in the next week or so at a price that will give us a big gain. Wed like to move now if possible rather than wait until mid-November.
Can we do that and not be taxed on the gain?
Answer: First, the bad news. Theres no special provision in the tax rules that allows you to rent it out for part of the two-year period. The townhouse must be your principal residence for two of the five years prior to sale for you to qualify for the exclusion. The exclusion can be up to $250,000 on the gain for singles and up to $500,000 for couples filing jointly.
There is a simple solution to your problem. Hold off the settlement on the deal for four to six weeks so that you fully qualify for the full two-year exclusion.
Now, the good news. Because youre moving because of your husbands health problems, you may qualify for a proportionate gain exclusion.
The IRS does allow this if your move is the result of a change in place of employment, health reasons or unforeseen circumstances. The IRS has been very flexible in its definition of unforeseen circumstances. Theyve even accepted a multiple birth in the family.
If you qualify, then, worst case, youd be able to exclude up to $500,000 x 22 months/24 months. In other words, more than $458,000 in gain could come to you tax-free. And, if you have more than $458,000 in gain over just two years, please introduce me to your real estate agent!
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