The Family Home, Part II

June 3, 2008

Most gay or lesbian couples choose to share ownership of their personal residence. If you are in a domestic partnership or simply living together as unmarried cohabitants, your most common choice is joint tenancy with rights of survivorship. If you are in a civil union, you have an additional choice, tenancy by the entireties.

If you own your home as joint tenants, you each own an undivided equal share of your residence. Furthermore, that equal share must exist from the time you take joint title to the property and must continue throughout the time you own this property. If you are in a civil union and you own your home as tenants by the entirety, you each own an undivided 100% share of your residence.

But what happens if one partner paid most or all of the down payment or other costs at closing? And what if one partner contributes more to the mortgage payment than the other? How do partners account for repairs during the ownership of their home or other costs associated with ownership? What if one partner can't afford to contribute any cash but performs work on the home? And what if one partner owned the residence entirely and then decides to put the title in both partners' names?

For heterosexual married couples, these issues are irrelevant. However, for same-sex couples, even if you are in a civil union, each of these scenarios can trigger federal important income tax, gift tax and death tax issues.

The federal Defense of Marriage Act (DOMA) was signed into law in 1999 by then-President Clinton. At the time it was passed, much of the discussion about this law focused on the part of the law that allowed the states to refuse recognition of same-gender marriages legally entered into in other states. But the really insidious effect of DOMA is that it defined terms like marriage and spouse throughout all federal laws and regulations, limiting these terms to heterosexual married couples. Among other inequalities, this means that same-gender couples, even if in a civil union, domestic partnership or marriage, are denied the exemptions and exclusions granted to heterosexual married couples under the federal tax laws and regulations.

The most important of these exemptions and exclusions is the federal gift tax exclusion. Each person is entitled to a lifetime gift tax exclusion of $1,000,000, which is composed of the aggregate of all reportable gifts you make in your lifetime. You do not have to pay gift tax on these reportable gifts until your aggregate of all gifts exceeds $1 million. However, you do have to file an annual gift tax return with your annual income tax return if you have made any reportable gifts during the year.

The key, here, is reportable gifts. Certain gifts are excluded from this reporting requirement. The most important exclusion is the $12,000 annual exclusion. You can make as many gifts of up to $12,000 to as many persons as you want each year, regardless of their relationship to you, without having to report the gift on a gift tax return. So, for example, if you give your partner $12,000 in 2008, you do not need to report the gift on your 2009 gift tax return. But, if you give your partner $12,001 in 2008, you have exceeded the exclusion and the $1 excess is a reportable gift.

For married couples, there is an unlimited exclusion for gifts between spouses. As a result, married couples never have to report these gifts and these interspousal gifts never count toward the lifetime exclusion. Unfortunately, because of DOMA, same-sex couples are denied this important benefit and must report gifts to their partners in excess of $12,000.

So what constitutes a gift that is potentially reportable? Well, clearly giving your partner $12,000 in cash is a gift. But so is a gift of jewelry or other material things. If you take your partner on a vacation and you pay for all or part of it, you've made a gift. Other things that the IRS considers gifts include no-interest or low-interest loans, unequal contributions to household expenses or joint bank accounts, or anything you transfer ownership of to someone for less than full market value. To the extent these accumulated gifts of cash and kind exceed $12,000 in a calendar year, you have made a reportable gift.

The most common gifts same-sex partners make involve their home. If one of you contributed less to the down payment when you purchased your home, and/or if one partner pays more of the expenses and upkeep of your home, then that partner has made a gift to the other. If the total contributed during any one year exceeds $12,000, then the excess constitutes a reportable gift.

The best way to avoid gift tax problems involving the joint purchase of a home is to turn the difference into a loan. If one partner is contributing most or all of the down payment, he or she can take back a promissory note in an amount that equalizes the down payment. The interest rate must be a fair market interest rate (otherwise, the lower interest rate constitutes a gift). You can make the length of the loan and the repayment terms quite flexible. For example, you could require that the loan be repaid at the time the house is sold, or within a specific time period. If one partner has the down payment but the other can afford to pay a larger share of the mortgage, the excess payment can be credited to the loan. Whatever you choose to do, the loan should be in writing and, preferably recorded in some way.

There are many ways to creatively handle the gift tax issues involving your home. The key is that you and your partner own an equal share of your jointly-owned home (and can prove it, if necessary). Taking the time to do this right today will help ensure that your family home doesn't get saddled with unexpected tax problems.

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