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What is the best way to help my parents pay to renovate a place, while minimizing the taxes?

Parents:

  • Cost of Renovation: ~$70000
  • Yearly combined income: ~$40000
  • House value: ~$350000 (Paid off)
  • Living in CA

Me:

  • Yearly income: ~$400000
  • Living in WA
  • Most the money is in mutual funds. (Cost basis is around 30% of the total)

I was wondering what the best way would be. Any suggestions that I should look more into? I saw that under the gift tax, the donee may agree to pay the tax; how would that work with ordinary/capital gains income. Is it better for them to take out a loan and for me to gift them money every year up to the annual exclusion?

Thanks!

  • BTW is "400,000" a typo? – Fattie May 7 '18 at 16:51
  • @Fattie why do you think so? I doubt it, at $400k it'd be no problem to finance a $70k renovation; at $40k the math wouldn't work out. – Kevin May 7 '18 at 17:33
  • I think nothing. It's a question. Note that two other people on this page (incorrectly?) assumed it was meant to be "40". – Fattie May 7 '18 at 18:18
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With gift tax it's not that the giver can agree to pay, the giver has the tax obligation, not the recipient. To the recipient the gift is not taxable income.

For 2018 you can give $15,000 to each parent as separate gifts, if you are married you and your spouse can each give $15,000 to each of your parents, for a total of $60k with no extra fuss.

If you gift the full $70k, you will have to file Form 709 with your tax return, but you won't actually pay any gift tax unless you've exhausted your lifetime gift tax exclusion (ie previously gifted over $10M in total).

If for some reason you didn't want to touch your lifetime exclusion, you could give up to the annual exclusion ($30k if you are single, $60k if married) and then you could either give the remaining $10k next year, or call the remaining $10k a loan and charge interest based on applicable federal rates (AFR, currently ~2%). Then you'd owe income tax on the interest accrued.

In this case, I'd just gift the full $70k and take the nominal hit to my lifetime exclusion rather than create a tax burden for myself.

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    I'll go out on a limb, and assume the OP doesn't do his own taxes. Most tax preparers charge by the form. I'd suggest (as you said) to gift the $60K now, again assuming OP is married, and I'd bet that with a total $70K renovation, it won't be done by year end. The parents, with a fully paid house, and $40K income, should (?) be able to cover $10K if only for a few months. No need to pay for the 709. – JTP - Apologise to Monica May 6 '18 at 10:53
  • No. For purposes of paying taxes on the capital gains the basis follows the gift. For purposes of gift tax or credit against lifetime exclusion, it’s the fair market value. – JTP - Apologise to Monica May 7 '18 at 20:05
  • Huh, wonder whether I misunderstood something somewhere or the source was wrong. – Kevin May 8 '18 at 2:17
  • Interesting. Thanks for the answer. If I understand correctly, I have the liability to pay taxes, but since I have not hit my lifetime exclusion, I can gift my parents money without paying any gift tax. In addition, I found out that I can directly gift stocks. Is this a possible solution? 1. Gift stocks to my parents with a low cost basis. 2. My parents sell the stocks, but since their income is relatively low, they will pay 0% capital gains tax. (3.) What prevents people from gifting that money back to the donator to basically evade capital gains tax besides the lifetime limit? – JThanos May 8 '18 at 22:55

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