Gifts are a common part of life, whether for birthdays, weddings, major milestones like helping with a down payment on a home or adding family to the title of real property for estate planning purposes. However, the federal gift tax implications aren’t always well understood. If you’re planning to gift property or assets, it’s important to know the rules to avoid unexpected tax consequences.
What is Considered a Gift?
The Internal Revenue Service (IRS) defines a gift as any transfer to an individual, either directly or indirectly, where adequate and full consideration is not received in return (in money or money’s worth). The donor is typically responsible for paying the gift tax. The general rule is that any gift is a taxable gift, however, there are some exceptions, such as transfers for less than the applicable annual exclusion amount. The IRS allows a donor to utilize an annual exclusion for gifts made in a calendar year. The annual exclusion for tax year 2024 is $18,000. In other words, a donor may transfer up to $18,000.00 per person in 2024, and such transfers will be excluded from the Federal Gift Tax.
Examples of Gift Tax Scenarios
To illustrate, let’s look at two common scenarios:
Example A: Gifting a Home
In 2024, an un-remarried widow transfers her $300,000.00 home to her son because she’s moving to an independent living facility. She receives nothing in return from her son for this transfer.
The mother, as the donor, should report this transaction to the IRS as a taxable gift. The amount of the taxable gift will be the fair market value of the property being transferred ($300,000.00) less the annual exclusion allowed under the IRS for 2024 ($18,000.00). As a result, the taxable value of the gift is $282,000.00.
Example B: Gifting Half of a Property
Now, imagine the same facts as Example A, except the donor adds her son as a one-half owner of the home as tenants in common.
In this example, the amount of the taxable gift will be the fair market value of the property being transferred ($150,000.00, one-half of the total fair market value since the donor is only transferring a one-half interest in the property) less the annual exclusion allowed under the IRS for 2024 ($18,000.00). As a result, the taxable value of the gift is $132,000.00.
As you can see, making gifts to family and friends can have significant tax consequences, especially when dealing with real property. Navigating the Federal Gift Tax rules and applicable exceptions should only be done with assistance from a licensed professional. That’s why you should always contact your trusted real estate attorney to help you with life’s biggest occasions, including buying, selling, or gifting real property.
Disclaimer: The above example(s) are hypothetical and are not based on a real-life taxpayer(s). This blog is not intended to provide specific tax advice to any individual taxpayer. You should always contact a tax professional regarding your individual tax situation.
