by Joseph A. Lewis, JD, CPA
Assuming your parent owns the home, if your parent sells the house, up to $250,000 of the gain from the sale may be tax-free. In most cases, in order to qualify for this $250,000 exclusion, he must have (a) owned the home for at least two years out of the five years before the sale, and (b) used the home as his or her principal residence for at least two years out of the five years before the sale. However, there is an exception to the two-out-of-five-year use test under (b) if the seller becomes physically or mentally unable to care for him or herself at any time during the five-year period.
Your parent can qualify for this exception to the use test if, during the five-year period before the sale, your parent (1) becomes physically or mentally unable to care for him or herself, and (2) your parent owned and lived in the home as his or her principal residence for a total of at least one year. Under this exception, your parent is treated as using the home as his or her principal residence during any time during the five-year period in which he or she owns the home and resides in any facility (including a nursing home) licensed by a state or political subdivision to care for an individual in your parent’s condition.
After the property is sold, your parent can transfer, for 2014, $14,000 to you, or $28,000 to you and your wife. If the only gifts made during a year are excluded in this fashion, there is no need to file a federal gift tax return. If annual gifts exceed $14,000, a gift tax return should be filed, and the exclusion covers the first $14,000. Even still, the excess probably won’t be taxable thanks to the “unified credit.” This is so because a tax credit wipes out the federal gift tax liability on the first taxable gifts that your parent makes in his lifetime, up to $5,340,000 (for 2014). However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at death.