Tax implications of paying off MIL's mortgage

[Josiecat22222]

Hi MMM forum members!  I'd like to poll the collective wisdom of this group for some information.

We are looking at paying off my MIL's mortgage balance for her to take the strain off of her finances.  This will cost us approximately 65K, which we are fortunate to be able to provide.  Our questions are:

1. Does this have tax implications for her?  Does it change her income and thus her taxes/medicare costs etc for the year?
2. Does this count as a "gift" which then has tax implications for her?
3.  Are there any tax implications for us?
4. If so, are they mitigated by having our name placed on the title (becoming co-owners, but allowing her to live there indefinitely)

Thank you for your insights!

[lhamo]

Under current IRS rules, you can each gift her $15k/year without any gift tax implications.

If you choose to give it all in a lump sum, you still would not have to pay gift tax on the excess amount as long as you filed the appropriate IRS forms in order to have the excess applied to your life-time estate tax exemption (currently up to 11million for a married couple).

https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes

The shared ownership option is also something worth considering, but more complicated.  You would probably want to consult an attorney experienced in eldercare and estate planning issues to be sure you understand the implications of that.  Especially what the implications would be if your mother needed government assistance for assisted living or nursing home care at some point -- primary residences are usually exempt from the financial calculations for that, but then there might be a clawback issue after her death (the state wanting to get the money back from the estate through the sale of the residence).

[Sandi_k]

Don't become a co-owner unless your wife is an only child. Other siblings may see it as an inheritance grab.

Secondly, it would have tax implications for *you*, as you would then have your MIL's "basis" in the house. If she bought it awhile ago, if/when she passes and you sell the house, capital gains would be based on the delta between what SHE paid, vs. what YOU sell it for. That could have a serious tax bills associated with it.

[Dee18]

Gifts do not count as income for tax purposes.

[Josiecat22222]

Thank you all for your insights!!

@lhamo- thanks for the link; We are going to review that and likely proceed with paying it off and then revising the will/trust documents to reflect that there will be a "recouping" of the investment upon the ultimate sale of the property as opposed to being on the deed.  Probably a bit cleaner that way.

@Sandi_k - I actually AM the wife!  ;)   but I appreciate your thoughts that this can cause conflict with his sibling.  And I really appreciate your thoughts on changing the basis, which we had not considered, especially since this house was purchased more than 30 years ago!!

Thank you all for your help!!

[Sandi_k]

Thank you all for your insights!!

@Sandi_k - I actually AM the wife!  ;)   but I appreciate your thoughts that this can cause conflict with his sibling.  And I really appreciate your thoughts on changing the basis, which we had not considered, especially since this house was purchased more than 30 years ago!!

Thank you all for your help!!

hahahaha! Sorry, brain fade there. But yes - siblings and basis! Best of luck!

[Dictionary Time]

That’s so wonderful that you can make your mother in laws life easier.  It’s very sweet to help her out.

 If there is a possibility of MIL needing Medicaid in the future, the house equity can be used to pay for it. Are you ok with that 65k disappearing? Or are you counting on getting it back eventually as inheritance? There may be a way to structure this, you might want to consult an expert on Medicaid before you write the check.

[MetalCap]

One thing to keep in mind, that happened to my grandmother, when you pay off the mortgage, there is no requirement to keep homeowners insurance.

Make sure that's kept in view along with paying property taxes.  My grandmother had a decent kitchen fire that required a gut of half of the house and required the family to pay for, in its entirety, because she let it lapse.

[MustacheAndaHalf]

We are looking at paying off my MIL's mortgage balance for her to take the strain off of her finances.  This will cost us approximately 65K, which we are fortunate to be able to provide.  Our questions are:
...
2. Does this count as a "gift" which then has tax implications for her?
3.  Are there any tax implications for us?

To prevent people giving away their entire estate, and escaping estate taxes, you have to track gifts above the $15k limit.  It won't impact you, technically, but it will impact your estate by lowering what is tax deductible.

If your MIL is married, you can speed this up: each person can gift $15k to each other person.
you -> MIL $15k
spouse -> MIL $15k
you -> MIL's husband $15k
spouse -> MIL's husband $15k

[SeattleCPA]

We are looking at paying off my MIL's mortgage balance for her to take the strain off of her finances.  This will cost us approximately 65K, which we are fortunate to be able to provide.  Our questions are:
...
2. Does this count as a "gift" which then has tax implications for her?
3.  Are there any tax implications for us?

To prevent people giving away their entire estate, and escaping estate taxes, you have to track gifts above the $15k limit.  It won't impact you, technically, but it will impact your estate by lowering what is tax deductible.

If your MIL is married, you can speed this up: each person can gift $15k to each other person.
you -> MIL $15k
spouse -> MIL $15k
you -> MIL's husband $15k
spouse -> MIL's husband $15k

Do something like above... avoid the work and headache of filing gift tax returns. E.g., .spread out gifts over a couple of years if you need to....

[Josiecat22222]

@SeattleCPA , how big a headache is filing the gift tax return?

Is it just filling out a form or is there more to it?  Asking because I am going to be the one doing our taxes this year....

Thank you all for the help!

[SeattleCPA]

It's a lot of work to do right. Especially the first time.

The easiest thing to do here is either trickle out a bunch of gifts, keeping under the annual de minimis threshold of $15K per giver-recipient limit.

The second easiest thing is to do the whole thing at once...e.g., $200K... and then pay some local CPA $600 or $800 or whatever to do the gift tax returns correctly.

BTW, no kidding, I refuse to do gift tax returns for my parents. I insist they keep gifts below the $15K threshold. I also apply same rule to other relatives for whom I provide tax accounting services...