Perspective | A primer on how the IRS gift-tax law pertains to parents and their children (2024)

That sibling would have to claim that amount and pay taxes on the difference, correct? At least it could stop the bleeding by that amount — maybe.

A: Thank you for your question. You make an interesting point about reporting elder abuse to the Internal Revenue Service, but we don’t believe that would be the right way to go. The IRS has bigger issues to deal with and very limited resources.

But let’s take a deeper look: When a parent gifts money to children (or others), you may have a gift tax issue. Current tax law permits anyone to give up to $15,000 per year to an individual without causing any federal income tax issues or reporting requirements.

Let’s say a parent gives a child $100,000. The parent would have no tax to pay on that gift nor would the child have any tax to pay upon receipt. What the parent would have to do is file a gift tax return showing that the parent gave a gift of $85,000 to the child ($100,000 minus the $15,000 annual tax-free gift amount). Under current law, the parent has a lifetime limit of gifts equal to $11,700,000. The federal estate tax laws provide that a person can give up to that amount during their lifetime or die with an estate worth up to $11,700,000 and not pay any estate taxes.

Gifts above the annual $15,000 limit that a parent makes over their lifetime count against the $11,700,000 limit. Given this high limit, it’s doubtful that the IRS would get involved. For gifts above this amount, we assume that the parties likely have the number of an experienced estate attorney on speed dial.

We’d also like to take the time to answer another question regarding an older homeowner.

Q: My dad, 89, owns three properties: a rural farm house on 50 acres worth $450,000 that he uses as a second home, a semirural house on 11 acres worth around $375,000 that is rented at $1,800 per month, and an urban home on a one-third of an acre in Washington, D.C., worth around $1,000,000 that he uses as his primary residence.

The rental home generates enough cash to pay the real estate taxes on the farm, and he has a reverse mortgage on his D.C. home of about $500,000. His D.C. home could be rented out as it has a basem*nt apartment and a three-bedroom separate residence. He could probably get $4,500 per month on his D.C. home in rent. It would be tough to rent the rural home, but it’s a great weekend rental near Virginia wine country.

He has five kids, and our mom is no longer around. Two of us are close to retirement and could manage his rentals. Dad’s health is very good, but he is anxious to get the reverse mortgage behind him. Fortunately, he does not want to sell. Any thoughts or recommendations on how to manage his real estate going forward?

A: We’re not sure what your questions are. Your dad is in good health and doesn’t want to sell the properties. We don’t know how he uses these properties, where he lives full- or part-time or whether he needs cash to live on.

That said, you estimate that your father’s real estate portfolio is worth around $1.8 million and is bringing in $21,600 per year. You also estimate he could rent his D.C. property for $4,500 per month, or $54,000 per year. That would pay his taxes and give him cash to live on, assuming he needs it, but may run afoul of his reverse mortgage requirement that he lives in the property full-time (unless you assume he’ll live in one of the units and rent the other).

You are willing to handle the affairs of renting these properties for him, but you’d need to know whether he wants to rent them or use them. Our first recommendation is to find out what your dad wants to do, where he wants to live, and whether he needs income from these properties to make ends meet.

If we put those issues aside, you seem to have a handle on the home that is currently rented. So that one is taken care of. The D.C. home could be rented, and you could handle interviewing tenants and handling that rental as well. You could even rent the basem*nt apartment of the D.C. home as well.

You’ve already stated that the farm home would be a difficult rental but might make a good short term or weekend rental on the websites that host weekend or short-term rentals. You can try going that route and seeing if there is enough money to be made that way and whether the time it takes to handle that rental is worth the money you get from the short-term rentals. As you’d rent the farm home furnished, you’d certainly want to make sure that any family treasures are not left in the home that could be lost or damaged.

So, if you rent all of these homes and your dad is getting good income from the rentals, where will your father call home?

If you can’t rent the D.C. property without causing an issue with the reverse mortgage, investigate selling the property, paying off the reverse mortgage and investing the net proceeds.

Again, the right answer starts with a deep conversation with your dad about what he needs in the way of cash and help as he enters his 90s. We hope he stays healthy for a long time to come.

Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (Fourth Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, bestmoneymoves.com.