There are complications in gifting home to family member

Q: My father bought a house many years ago that is fully paid off. He now wants to gift it to me. What are some of the tax consequences and other considerations we should think about? — Nancy R. A: First of all, gifting a home may be problematic for your dad if he needs Medicaid coverage in the near future. That’s because Medicaid has a five-year “look-back” period to determine if applicants have transferred off any major assets to become eligible.

A penalty in the form of a multiple-month delay in coverage could be assessed against him.

If we assume the average monthly cost of nursing home care in your state is $6,000, then Dad would have to wait years for Medicaid to kick in.

For example, if he transferred a $240,000 house to you on May 1, 2017, and unexpectedly needed to move to a nursing home on May 1, 2018 and spent down his remaining assets to become Medicaid-eligible on May 1, 2019, that’s when the penalty would begin.

It’s duration in this case would be 40 months ($240,000/$6,000 = 40), meaning he wouldn’t become eligible for coverage for three years and four months. You will definitely need to talk with a qualified estate or elder law attorney or financial planner if you think he may need Medicaid at some point.

If not, gifting a home makes more sense, assuming he hasn’t already given away millions. While a person giving away property valued at more than $14,000 in a given year must file a gift tax form, that gift will only be taxed if it causes him to exceed or further exceed his lifetime federal individual estate and gift-tax exemption limit of $5.49 million (up from $5.45 million last year).

So unless your dad is relatively wealthy and has gifted enough in his life to exceed that threshold, he won’t incur a gift tax by giving you the house.

But you should also know that if you were to sell the place quickly after receiving it as a gift, you would face a hefty capital gains tax. That’s because when a home is given away, its original cost to the giver — its “tax basis” — becomes the recipient’s tax basis unless that recipient lives in it for at least two years before selling.

In other words, if your dad bought the house for $140,000, and you turned around and sold it off posthaste for $240,000, you’d owe capital gains taxes on that $100,000 profit, if you sold before those two years expired.

In another tax-saving scenario, your dad could sell the house to you for market value at a low down payment and hold the note himself, possibly with an arrangement to forgive the balance of the note if he dies before you pay it off. Avoid being targeted by the IRS

Then, there are a couple ways your dad could give you the house and still live there without feeling the wrath of the IRS, assuming you are inclined to live together.

One is with a qualified personal residence trust, or QPRT, which would allow Dad to move the residence out of his taxable estate without vacating it. An IRS formula would then put a value on his right to live in the house with the balance considered a gift, subject to that $5.49 million federal gift tax exemption limit.

The other way is if he was to sell you the home for fair market value but pay market-level rent afterward to remain there. As for simply inheriting the property when he dies, the home’s tax basis would then get “stepped up” to market value, which would eliminate capital gains taxes on any appreciation on it after he bought it. Q: I’m a seller and after four months of granting home buyers contract extensions, I’m not going to grant another. The current buyers have financing issues and apparently have made purchases and deposits on several things in the run-up to closing that have jeopardized their credit. I’ve signed off on previous extensions, but the last contract extension is now expired. Am I still at the mercy of the buyers? No. Many sellers in your situation who have granted extension after extension are rewarded with nothing in the end because buyers just can’t repair their credit in time. Unless there’s a stipulation giving the finance-challenged sellers more grace time, your instinct to exit is right.

Some contracts may stipulate that the seller must give the buyers “notice to perform” within a set period, even after a previous contract extension. But if you’ve not been asked to sign off on another one or on an amended escrow agreement, you’re probably in the clear.

There’s a bigger risk of getting sued if you announce you are keeping the deposit, especially if it’s a significant sum, even if you believe you have a contractual right to do so. Yes, you have been inconvenienced, but do you want to risk going to court?

While it may be that the buyers didn’t realize that making a bunch of credit purchases before closing (always inadvisable), would count against them with the lender, that’s their “bad.” Someone, be it their lender or agent, should have informed the buyers of this no-no, although that warning isn’t required by law.

One way to largely determine whether the buyer’s contract is now kaput is to see a lawyer. Even then, there’s no sure way to know if the buyers will sue should they have any grounds. But if I were to guess, buyers wanting to sue would be informed by their counsel that they’ve already broken the contract, which, by the way, is also expired.

Other options for you include sticking with the sellers but asking them for a larger deposit with stricter deposit forfeiture language or at least demanding a per diem for every day the closing is delayed.

It’s time to unbind your house so serious buyers can have a go at it. And next time, don’t accept an offer from a buyer without a preapproval letter.