Taxes on Gift to Relative are Paid at Death
Question: My granddaughter and her family live in a home that I own in Cottonwood. I have been paying the mortgage payments, property taxes, repairs, and other costs of the home for the past two years because my granddaughter has been sick and unable to work. These costs of the home are approximately $30,000 per year. Can I deduct these costs from my income taxes? If I give the Cottonwood home to my granddaughter, will my granddaughter have to pay gift taxes?
Answer: You are not using the Cottonwood home as a rental property, but are simply being a wonderful grandmother by letting your granddaughter and her family live rent-free in the Cottonwood home. Therefore, you cannot deduct as a business expense the costs of the home on your income tax return. If you give the home to your granddaughter, your granddaughter will not be obligated to pay any gift taxes because the person receiving the gift, i.e., the donee, is never obligated to pay gift taxes.
You as the donor, however, will be liable for any gift taxes. Gift taxes are not owed by the donor at the time of the gift, however, but are owed at the time of the donor’s death. If the donor’s estate has a tax liability at the time of death in excess of the federal estate tax exemption, estate taxes will be owed. For example, if you gave the Cottonwood home to your granddaughter this year and you died this year, your estate should have tax liability for your gift of the Cottonwood home only if the value of your total estate, including the gift of the Cottonwood home, exceeded $5,430,000, which is the 2015 estate tax exemption for the estate of a single person such as you.
The 2015 estate tax exemption for a married couple is $10,860,000. Due to these estate tax exemptions, according to Wikipedia, only 0.2% (one out of 500) of estates pay any estate taxes.