Legal Question in Real Estate Law in California

You need to repost this to the Tax section of the website. This is not a real estate question, but rather a tax question. Good luck.

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The question about gift tax liability would have to be answered by a tax advisor after a personal interview which would cover other aspects affecting potential liability, but the best answer that can be given on the information provided is that you, not your children, would be "potentially" liable for the tax. In addition to your tax advisor, you may want to consult IRS Form 709 and the instructions for its use, which contain the current rates and a lot more information.

The gift occurs for federal tax purposes on the date appearing on the gift deed, and the liability to pay it would arise then, and the tax is due on April 15th following the year in which the gift is made. It is the capital gains tax that becomes a liability when the property is sold, and when the property is acquired by inter vivos gift, as you propose, the tax can be whopping.

Let me give you some other reasons why making a gift of problem property to children or other relatives or friends is seldom a good idea:

First, if the property is subject to a loan, the loan documents will almost certainly contain what is generically called a "due on sale" clause. Basically, this requires the borrower to pay off the loan whenever ownership changes. There might be a few exceptions, such as when the sale is ordered in connection with a dissolution of marriage, but generally making a gift of the property will trigger the obligation to pay off the loan, in full, at once.

Next, the borrower does not escape loan liability by disposing of the collateral. The lien of the note and deed of trust remains attached to the collateral, and the individual borrower remains at least nominally liable for payment (although rarely is the borrower personally liable due to the operation of the one-form-of-action, collateral first and antideficiency laws.

Also, if the children are minors, they would lack legal capacity to manage or sell the property.

The gift and capital-gains taxes dictate, in most cases, that family wealth should be inherited, preferably in trust, by will is OK but involves probate, but not given as inter vivos gifts.

Finally, the Uniform Fraudulent Transfer Act, Civil Cide sections 3439-3439.12 declares certain transfers made for less than full value and having the purpose or effect to hinder, delay or defraud a debtor's present or anticipated creditors to be fraudulent. A court can set aside fraudulent transfers and both the transferor and the transferee may be penalized.