top of page

A Handbook on How the IRS Gift Tax Law Applies to Parents and Their Children

We have heard from various readers about the mention of elder abuse in a recent column, and one reader suggested reporting the abuser to the IRS.

Q: I read your recent article (referring to) possible elder abuse. Why didn't you suggest reporting the abusive sibling to the IRS when a parent has been manipulated with large sums of money, particularly because the gift exceeds the annual gift limit set by the IRS?

That brother would have to claim that amount and pay taxes on the difference, correct? At least it could stop the bleeding by that amount, maybe.

A: Thanks for your question. He makes an interesting comment about reporting elder abuse to the Internal Revenue Service, but we don't think that's the right way to go. The IRS has bigger problems to deal with and very limited resources.

But let's take a deeper look: when a parent gives money to their children (or others), they may have a gift tax problem. Current tax law allows anyone to give up to $ 15,000 per year to an individual without causing problems with federal income tax or reporting requirements.

Suppose a father gives his son $ 100,000. The parent would not have to pay any tax on that gift, nor would the child have to pay any tax upon receipt. What the parents would need to do is file a gift tax return showing that the parent made a donation of $ 85,000 to the child ($ 100,000 less the annual tax-free gift amount of $ 15,000). Under current law, the father has a lifetime gift limit equal to $ 11,700,000. Federal estate tax laws stipulate that a person can give up that amount during their lifetime or die with an estate worth up to $ 11,700,000 and pay no estate tax.

Gifts over the $ 15,000 annual limit that a parent makes during their lifetime count toward the $ 11,700,000 limit. Given this high limit, it is doubtful that the IRS will get involved. For gifts above this amount, we assume the parties likely have the number of an experienced speed dial probate attorney.

We would also like to take the time to answer another question regarding an older owner.

Q: My 89-year-old dad owns three properties: a 50 acre farmhouse worth $ 450,000 that he uses as a second home, a semi-rural home on 11 acres worth about $ 375,000 that rents at $ 1,800 per month, and a townhouse on a third of an acre in Washington, DC, worth about $ 1,000,000 that he uses as his primary residence.

The rental house generates enough cash to pay property taxes on the farm, and he has a reverse mortgage on his house in D.C. of approximately $ 500,000. His house in DC could be rented, as he has a basement apartment and a separate three-bedroom residence. You could probably get $ 4,500 per month on your DC home for rent. It would be difficult to rent the cottage, but it makes a great weekend rental near Virginia's wine country.

He has five children and our mother is gone. Two of us are close to retirement and we could manage your rents. Dad's health is very good, but he's eager to put the reverse mortgage behind him. Fortunately, you don't want to sell. Any ideas or recommendations on how to manage your real estate in the future?

A: We are not sure what your questions are. Your dad is in good health and doesn't want to sell the properties. We don't know how you use these properties, where you live full or part time, or if you need cash to live.

That said, he estimates that his father's real estate portfolio is worth around $ 1.8 million and generates $ 21,600 per year. He also estimates that he could rent his property in D.C. for $ 4,500 per month or $ 54,000 per year. That would pay your taxes and give you cash to live in assuming you need it, but it may violate your reverse mortgage requirement that you live in the property full time (unless you assume you will be living in one of the units and renting the other).

You are willing to handle the matters related to the rental of these properties for him, but you need to know if he wants to rent or use them. Our first recommendation is to find out what your dad wants to do, where he wants to live, and if he needs income from these properties to make ends meet.

If we put those issues aside, it seems like you have control over the house that is currently rented. For one to take care. The house of D.C. it could be rented, and you could take care of interviewing the tenants and handling that rental as well. You could even rent the apartment in the basement of the DC house.

You've already said that the farmhouse would be a tough rental, but it could be a good short-term or weekend rental on websites that host weekend or short-term rentals. You can try going that route and see if there is enough money to make that way and if the time it takes to handle that rental is worth the money you get from short-term rentals. Since you would rent the farmhouse furnished, you surely want to make sure that no family treasure is left in the house that could be lost or damaged.

So if he rents all these houses and his dad makes good income from the rentals, where will his dad call home?

If you are unable to rent the D.C. Without causing a problem with the reverse mortgage, investigate the sale of the property, cancel the reverse mortgage, and invest the net proceeds.

Again, the correct answer begins with a deep conversation with your dad about what he needs in cash and help when he turns ninety. We hope you stay healthy for a long time.

18 views0 comments


bottom of page