The Help Desk

Your tough questions. MONEY's smart answers.
Presented by

What's the tax bite on gifting a home that's been used for business?

May 15, 2012: 5:05 AM ET

My wife has had a home-based business for the last 25 years and is now ready to retire. She has depreciated our home over that time to help offset income. The home will be paid for in five more years. At that time, I would like to deed the property to an LLC that my wife and I own for that purpose. We will then "gift" our ownership shares to our two children. Will my wife and I owe any additional taxes due to the depreciation that has been taken? Will my children have to worry about paying taxes if they choose to sell?
-- W. H., Omaha

If you've depreciated the entire home over the past 25 years, you may have some tax issues of a separate sort. "Unless the home was used entirely for business, you cannot write off 100% of the cost," says Donald Duncan, a financial planner and CPA in Chicago. Assuming you stick to your current plan, however, recapturing any depreciation won't enter into the picture until the home is sold—and may not be a problem at all. It's a complicated issue tied to how much you paid for the home, how long you've owned it, how much you depreciated, and when you sell.

The real question is why you're doing this at all. Are you trying to gift assets to your children to remove them from your estate? And are you also trying to stay under the gift tax exemption amount at the same time? You can't gift fractional shares of your home, and you're only allowed to gift up to $13,000 per person per year without using up some of your lifetime gift tax exemption. Hence, deeding the property to an LLC and gifting ownership shares to your children over time is a clever solution to that problem.

However, this move creates a different issue for your children. If you gift the home in this way, they retain the same cost basis that you have—and when they sell, if the home is not their primary residence, they'll owe capital gains taxes on every cent of appreciation since you bought it. One of your children would have to move into the home and use it as her primary residence for two out of the five years before the sale to save on taxes—she would then qualify for the $250,000 tax exemption if she's single, twice that if she's married. (Although she then may have to deal with depreciation recapture, depending on how much of the home you depreciated.)

If, on the other hand, you leave the home to your children in your will, the cost basis would be reset to its market value when you die, and your children could then sell it, tax- and depreciation-consequence free. It would still be a part of your estate, but there's currently a $5.12 million estate tax exemption in place.

Depending on your goals, it's probably a good idea to consult a tax-savvy financial planner before you move forward. "The tax consequences could backfire," Duncan says.

--Kate Ashford

Got a question for the help desk? Send it to

Join the Conversation
Help Desk

Got a question about your money? We want to hear it! Each week we're answering your questions on CNN, Headline News and CNNMoney.com.

Your email or phone number won't be published; we'll use it to get in touch if we need more information about your question.
Help Desk Video
  • NEXT
    Not enough money in America's 401(k)s
    Despite the surging stock market bringing balances to record highs, the average Fidelity 401(k) account has less than $100,000 in it. That's just not enough. Play
  • NEXT
    BACK
    Explaining Obama's myRA
    President Obama unveiled a new savings plan for retirement accounts, aimed at encouraging people to start building their nest egg. But how exactly does it work? Play
  • NEXT
    BACK
    Tricks on how to save in your 20s
    Saving for your retirement in your 20s doesn't have to be a financial burden. Prioritizing your expenses is usually the first step in building a nest egg. Play
  • BACK
    Don't get fooled by Black Friday sales
    Here are some of the tricks that retailers use to make you think you're getting a deal. Keep an eye out for them while shopping this Black Friday. Play
Best Tips
Some of the nation's leading business owners, investors, and thinkers share their thoughts on rebuilding your wealth. More
These strategies can help you manage the challenges -- both emotional and financial -- of helping an aging parent from afar. More
You don't need to be fanatical to get to 780. Those in the know say these moves matter most. More
Featured Newsletters

Tips for saving and spending smarter.

Search This Column
View all entries from this: Week, Month
Help Desk
More help for your career, your investments and your budget.
Powered by WordPress.com VIP.