Mom and Dad are successful business owners who spend all of their time in New York. Junior lives in Florida, about 20 minutes away from the condominium his parents bought but never used. As a gift for his upcoming wedding, mom and dad decide to give Junior the condo. A few years later they are shocked to receive a notification from the IRS about the transfer. Don’t let this happen to you!
Gifting real estate is becoming quite common these days. With the economy in poor shape, many young people are struggling to find affordable housing. Their well-off parents correctly presume that it will be quite a help to their child to gift him or her real estate they aren’t using. The real estate might be worth a fraction of what they paid for it, so why not simply give it to their son or daughter instead of selling at a loss? There is nothing wrong with this as long as you remember to comply with IRS filing requirements.
On-going investigation for nearly two years
In early 2010, the IRS began a compliance investigation for real estate transfers across the country. According to reports about the investigation, the IRS has been requesting information on property transfers from state governments. The State of California decided to challenge this request in court and won. Not every state government, however, has had concerns about transferring this information. So far 15 states have complied with the requests.
The IRS is cross referencing this information with their own records to determine which taxpayers have not declared the transfer. Depending on the value of the transfer and the cumulative value of previous gifts made, unreported transfers could lead to serious taxes and penalties in excess of one third of the value of the property. In extreme cases, it could lead to criminal prosecution.
IRS Form 709
It’s important to remember that the IRS allows up to $13,000 in gifts per year between two people without any tax or filing consequences. You can in effect give $12,999 each to 100 people on the street and you wouldn’t have to do anything (other than have your head examined). The IRS requires that taxpayers prepare Form 709 “United States Gift and Generation-Skipping Transfer Tax Return whenever you give a total of $13,000 or more to someone in a given year."
The condominium in my hypothetical example would require the filing of Form 709. Just because you make the gift and its over $13,000 doesn’t mean you automatically have to pay a tax. Instead, the IRS will keep track of these gifts over your lifetime. Upon your death they will sum up the value of these gifts to determine if they exceed the taxable exemption. If so, then taxes will be due on the amount above the exemption. If not, then you’re in the clear. The current exemption for gift taxes is $5 million, but this could change at any time with new legislation. Prudent estate planning can of course mitigate these tax consequences.
There are also alternative ways to help relatives without giving them property outright. One common way is to loan money to them. Yes, this carries many risks. But if it’s executed correctly, it may be a more effective vehicle for assistance than gifting.