Weigh Tax Impacts Before Transferring Title

Q: What would the consequences be on state, federal and local property taxes if I were to transfer title to my home to my son now?-- P. S.

A: Let’s start with income taxes, both state and federal. According to our experts, your income tax obligations would not be affected by such a move. Neither would your son’s--at this point. However, when he sells the house, his tax basis in the house is your original basis--so his tax liability could be considerable, depending on the amount your house has appreciated over the years.

Local property taxes also pose no problem to you, now or later. In California, gifts of property between parent and child do not trigger a reassessment of the property as an outright sale would.

However, before you think you’re home free here, there are other issues you did not raise which could affect your evaluation of the pending deal.

For example, the transfer will have gift-tax implications. You are allowed to make gifts totaling $600,000 over your lifetime or upon your death without paying gift tax to the federal government. If the value of your house exceeds that amount, you would owe gift taxes immediately on the amount above $600,000. But even if your house is worth less than $600,000, the value of your house is deducted from your lifetime limit, possibly triggering a gift tax assessment later when you make another gift, or estate tax upon your death.

Finally, you did not mention whether you intend to continue living in the house after giving it to your son. Beware, if you do. The IRS has been known to argue that such arrangements are improper attempts to circumvent estate taxes and may attempt to include the house--despite the earlier gift--in your estate. In this case, the IRS would value the house as of your date of death and use that value to compute any estate tax. Meanwhile, of course, your earlier gift of the house would have exhausted at least a portion of your $600,000 exemption, leaving you caught in a double tax whammy.

Even if you don’t live in the house after giving it to your son, you should know that your son may well be better served receiving your assets after your death, rather than before. Why? When you give assets away, their value for tax purposes is their original value to you, not what they are worth on the date you give them away. However, the same items, if bequeathed at death, are valued as of the donor’s date of death.

Let’s say your tax basis in your house is $50,000 and it is worth $400,000 when you give it to your son. If he sells it immediately, he will owe taxes on about $350,000 of profit, roughly speaking. However, if you left the same house to him in your will and he sold it for $400,000, he would have no tax liability since its tax basis would have been what he sold it for.

IRAs Can Be Known by Different Names

Q: In 1983 I opened an Individual Retirement Account by purchasing a certificate of deposit at a local bank. When the certificate matured, I withdrew the funds and transferred them to a thrift that offered a higher interest rate. The S&L; insisted that my new IRA be listed as “contributory” and not a “rollover.” However, I am not eligible to make contributions to IRAs this year, and furthermore, the new account is really a transfer. Did the S&L; make a mistake? Do I need to do something fast to fix this? -- A. C. C.

A: Relax. What you have is a mix-up with your S&L; over the use of the words “contributory” and “rollover.” And both of you, to an extent, are correct.

Here’s the situation: When you opened your account in 1983, it was a contributory IRA, not a rollover of pension funds because you were the source of the funds. So, even now, about seven years later, your S&L; considers the account a contributory account. You, on the other hand, obviously consider the account a rollover since you transferred your funds from one institution to another when your certificate of deposit expired. It may be a rollover now, but the account originated with your contribution, so technically it is now a rollover of a contributory account.

These semantic differences should make no difference to anyone, and the accounts should be treated identically, with one exception: You may never transfer this IRA, which originated as a contributory account, into a pension plan, as you could if it had originated as a pension rollover. These funds were never a part of a pension fund and must be kept separate from pension accounts.

Leaving State Affects Interest Income Taxes

Q: I will soon move from California. Although I won’t have earned income from state sources, I will get about $30,000 a year in interest from a note secured by California real estate. Must I pay California state taxes on this income? Also, when the note is repaid entirely in 1993, will I owe taxes to the state on my gain from the property sale? --H. A. T.

A: Our advisers say your interest income, much like stock dividends and other unearned income, is considered personal property and is not subject to California taxation once you move out of the state. However, you will owe state tax when the loan balance is repaid in 1993 because the note is secured by California real estate.