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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!

1 Answers1

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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.

Hart CO
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