If My Parents Gift Their Home to Me, Do I Have a Tax Liability?

Parents can gift their home tax-free by using their unified credit.

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Your parents can give their home to you as a tax-free gift if the transaction meets the Internal Revenue Service definition of a gift. Your parents must legally own the property and intend to give it to you as a gift. They must relinquish all rights and ownership of the house and retitle the house in your name. You must willingly accept the gift and physically take possession of the house.

Who Pays the Gift Tax

Under IRS regulations, the person who makes the gift pays the tax. In this case, your parents are responsible for paying any gift taxes. The gift tax liability is calculated on the net value of the house, which is its current market value less the basis amount. For example, if your parent’s house has a fair market value of $150,000 and they bought it for $50,000, the IRS calculates the gift tax on the net value of $100,000.

Offsetting the Gift Tax

Anyone can give a certain value in gifts, tax-free, every year: this amount is always free of gift tax. As of the 2013 tax year, this amount is $14,000. In fact, each of your parents can exclude $14,000, because each of them is entitled to give you a gift. For example, if the gift’s net value is $100,000, they can exclude $28,000 from being taxed. If you have a spouse, they could choose to exclude another $28,000 from gift tax. The gift tax would then be reduced by $56,000, and they would only owe gift tax on the remaining $44,000 of the gift's value.

Eliminating the Gift Tax

The IRS also allows you to reduce the amount subject to gift tax even further -- and possibly eliminate it altogether -- by using something called the "unified credit." This is the total amount that anyone can shelter from gift taxes and estate taxes. For 2013, the amount is $5,250,000. Unless your parents are very wealthy and expect to leave an estate larger than this -- that is, an estate large enough to be subject to estate taxes -- they can simply use the unified credit to avoid paying gift tax. To continue the example, if the remaining value of their gift were $44,000, they could choose to use their unified credit. The amount of their assets sheltered from estate taxes when they die would then be lowered by $44,000: $5,206,000.

Paying the Gift Tax

If your parents will have a large probate estate and do not want to use their unified credit, they must pay the tax and file a gift tax return using Form 709. If both of your parents gave you the house, each one must file a separate gift tax return. The IRS does not allow you to file a joint gift tax return. The net value of the house, the gift tax and the payment is split between your parents on the returns. They must file the tax returns between January 1 and April 15 the following year.