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Hi -

Because of cash flow & other personal reasons, my father-in-law would like to transfer his home to my wife and I, and we would let him continue to live in his house for free. We think that the best thing to do would be for him to "gift" the house to us so that property taxes won't change. (He bought the house for around $220k and the market value is the same or a little less) Since he won't have more than $600k in his estate, he won't need to worry about any federal gift taxes.

My question is: What are the tax implications of paying off his 1st & 2nd mortgages plus some of his personal credit card debt after we refinance on the new home? Will we get hit with a gift tax for paying off more than $10k of his debt? If so, how can we get around it?

Is it better to buy the house for the amount of his debt we are paying off ($100k)? The problem with that is we are essentially lowering the cost basis of the home, right? If that happens, we stand to lose more money to taxes when we decide to sell the home someday. Wouldn't we get taxed on the market value (say, 200k) less the cost basis (now, 100k)? By making the house a gift, then we would only get taxed on any sale amount we receive greater than his original purchase price of $220k.

Any thoughts? ideas?

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