Legal Question in Real Estate Law in California

Re: Gifting real property to my son

(1) Your tax basis (not "base") is your cost to acquire the property, plus long-term or permanent additions and betterments. If you bought a house in 1980 for $50,000, in 1990 spent $10,000 on an addition, and in 2000 replaced a 20-year roof with a 30-year roof for $1,000 more than a 20-year roof would have then cost, your tax basis is $61,000.

(2) The tax basis of property is a financial fact, somewhat like the record high temperature in Fresno on May 25th being 104 degrees (or whatever). The IRS sets the rules as to what outlays may and may not be added into the basis, but it is pretty much up to the homeowner to keep track of what expenditures add to the basis and which do not. Your tax preparer may be able to assist. The IRS is not big on questioning homeowner calculations of their basis, unless some claim is made for an outlandishly high basis.

(3) I believe that if property is given during a parent's lifetime, the tax basis rather than the current market value at the time of the gift is used both for computing gift tax liability and for the donee son's basis for use when he eventually sells the real property. This is different than when the property is inherited by will or under the terms of a living trust, in which case the property gets a (hopefully!) stepped-up basis reflecting fair market value on the date of inheritance.

Here's how it works in practice, to use the capital gains tax as an example: if you give your son the real property with its $61,000 tax basis today, and it is worth $400,000 today, and he sells it in 2015 for $700,000, his gain is $700,000-61,000 or $639,000, and at 15% (if that rate holds, which it probably won't), he'll pay $95,850 capital-gains tax. If, however, he inherits tomorrow and sells in 2015, his taxable gain is $700,000-400,000 and his tax is $45,000.

I'll decline to guess about gift taxes because there are too many factors in their determination. I do strongly recommend getting professional advice on family wealth-preservation issues; it is so worth the price!