Quit Claim

[ekabob]

Client has rented a home to her daughters family for a few years. Has been claiming income and depreciation is $40,000.

FMV of home is $150,000, balance due on mortgage is $150,000.

If the home is quit claimed to the daughter who assumes the loan is there a tax liability to the mother.

Wishing for a simple answer...

Thanks in advance, EkaBob

[ATSMAN]

Client has rented a home to her daughters family for a few years. Has been claiming income and depreciation is $40,000.

FMV of home is $150,000, balance due on mortgage is $150,000.

If the home is quit claimed to the daughter who assumes the loan is there a tax liability to the mother.

Wishing for a simple answer...

Thanks in advance, EkaBob

Filing a Quit Claim to relinquish ownership would have the effect of gifting that property to the daughter. She should file a gift tax return. Daughter's tax basis will be the same as donor's tax basis.

[Burke]

Which is the donee's cost basis less depreciation. It is immaterial what the FMV or the mortgage is.

[JMO]

Informal Real Estate Deals Between Family Members

You can verify if the transaction was a sale or a gift by asking the client for a copy of the real estate/tax forms that were filed with the deed at the County, which specifies the taxable value of the transaction. Then, you can determine if it was sold for $150k or gifted.

Sale: If the mother outright "sold" the property to the daughter for $150k, then it will need to be reported on the mother's tax return for the year the sale took place.
Gift: If it was clear that the transaction was a gift, and the mother is subsequently relieved of $150k debt for tax purposes, then a gift tax return is required.

NOTE: If the daughter informally assumes the mortgage (by simply making all future payments), the 1098 form for mortgage interest will continue to be issued in the mother's name and reported to the IRS with the mother's social security number. You'll want to attach a disclosure statement for each tax year that the mortgage remains legally titled to the mother's name to explain that the mother is the legal owner, but the daughter is the equitable owner. If the daughter formally assumes the mortgage by undergoing a loan application process as of the year of sale, then a disclosure statement would not be necessary.

Also, you may want to look into any implications of it not being an arms-length transaction.

[ATSMAN]

In my area the typical gift of a real estate property to a family member or friend is recorded at the registry of deed for a $1! What I do typically is look at the real estate valuation for tax purpose just before the transaction (fortunately most real estate valuations are online in my county). That provides the first answer when the tax valuation is significantly higher than the actual value recorded.

A family member paying the mortgage interest of property not currently owned by them but in anticipation of a future gift or inheritance is very common. I have one in my extended family where the daughter is paying the mother's mortgage payments. This is because they don't want the appreciated property to be foreclosed but since both file returns with standard deduction there is no tax advantage for the mortgage interest paid.