If you transfer property to a family member, what are the tax implications?
Editor’s Note: Transferring property to a family member could have tax consequences. It depends on the scenarios. Read on as we dive into a few common scenarios if you give property to a family member.
Real estate transfers are common among family members. Whether it’s to pass down your legacy to loved ones or a part of an estate planning strategy, these transactions happen for many reasons. While property transfers can be useful to accomplish a particular goal, not all taxpayers consider the tax consequences.
There are other non-tax related issues to consider before attempting the property transfer by deed, will, or trust. Thus, here are common property transfer scenarios between family members and the respective tax implications:
Family property transfer: Adding a joint owner
You add another family member to the deed as a joint owner of your home so that it will pass to them automatically upon your death.
Adding a family member to the deed as a joint owner for no consideration is considered a gift of 50% of the property’s fair market value for tax purposes. If the value of the gift exceeds the annual exclusion limit ($16,000 for 2022) the donor will need to file a gift tax return (via Form 709) to report the transfer. However, they will not likely owe gift tax due to the unified gift and estate tax exemption, which is $12,060,000 for 2022. Additionally, each owner will have to adjust their basis in their respective ownerships interests on the date of the transfer.
When one of the owner(s) of the property die, the decedent’s personal representative must include the fair market value of the decedent’s ownership interest in the gross estate for estate tax purposes. The surviving owner receives the decedent’s ownership interest with a stepped-up basis equal to the inherited property’s fair market value (generally the same amount included in the decedent’s gross estate). The surviving owner combines the stepped-up basis in the inherited portion with the basis received at the time of the gift to determine their total adjusted basis in the entire property. (Basis is used to determine gain or loss when the home is later sold.)
Adding a family member to the deed while retaining a right to use the home exclusively for the rest of your life has different tax consequences. This situation results in the creation of a life estate, which is discussed next.
Family property transfer: Gifting real estate
You give a real estate property to a child or grandchild.
If you give a plot of land to your child or grandchild, it’s considered a gift in the eyes of the IRS. Real estate gifts to a child or grandchild aren’t tax deductible. You can’t claim a loss, even if the paperwork shows you sold the property for $1 or another nominal amount. So, the tax issues relate to the nature of expenditures, not savings.
For example, if you gift land worth $500,000 and you do not receive anything of that value in return, there are tax implications for the donor. The IRS allows you to give $16,000 (for 2022) annually to anyone you like, tax-free. If you’re married, you and your spouse can each give $16,000 (for 2022). However, if the value of the gift exceeds the annual exclusion amount, you, as the donor, must file a gift tax return (Form 709) to report the gift. As discussed earlier, you will not likely owe any gift tax if you have not yet used up your unified gift and estate tax exemption.
While you may think you can fly under the radar with real estate transactions, this is not the case. Do your research on property transfers so you can plan ahead from a tax perspective.
Disclaimer: If you are considering transferring property to family, talk to an attorney licensed in your state with expertise in real property transfers.
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