IRS Tax Laws in Regards to Gifts of Equity in Real Estate

By Jane Meggitt
You must gift real estate at fair market value. Images

The Internal Revenue Service doesn't make a distinction between cash and real estate equity gifts for tax purposes. In 2014, the annual gift exclusion is $14,000 per person. However, a married couple could each give a child and the child's spouse a gift of real estate equity, for a total of $56,000, without triggering gift taxes. Those taxes are generally paid by the donor, not the recipient.

Gift Timing

Since the gift tax limits are annual, in a best-case scenario a married couple can each gift a married child and spouse a total of $56,000 in December and another $56,000 in January, for a total of $112,000 in a short time period. That amount of real estate equity means the recipient couple can use a mortgage or cash to pay for the value of the property above $112,000. You can also give away a percentage of real estate you own as a gift, but the gift must be made at fair market value. For example, if your married child wants to purchase the family home valued at $224,000 when you downsize, you and your spouse can gift her and her spouse 25 percent of the house in December and another 25 percent in January. They can then purchase the rest of the house from you through a combination of a mortgage and savings equaling $112,000, making it a very good deal for them.

Fair Market Value

The IRS requires that real estate gifts are determined at fair market value, which is the price at which the property would change hands between a willing buyer and a willing seller when neither is compelled to buy or sell and both are aware of all facts regarding the property. That means you can't sign over a property valued at $200,000 to your married children and claim it's only worth the maximum $56,000 annual gift tax exclusion for that situation.

IRS Gift Tax Filing

The individual donor must file IRS Form 709 no later than April 15 in the year after making a gift to an individual in excess of the annual limit. Spouses must each file their own Form 709. If you request an extension to file your federal tax return, your gift tax return form automatically receives the extension. If you only want an extension for your gift tax return, file Form 8892 for a six-month extension. You must still pay any taxes due by the original filing date -- but because of the federal lifetime exclusion, very few Americans actually owe tax. To prove the fair market value of the real estate gift to the IRS, you should have the property professionally appraised. You must attach copies of the appraisal to your gift tax return, along with related documents regarding the equity transfer. These gifts are not tax deductible for the donor unless they're given to a charitable organization.

Federal Estate Tax Exemption

Only quite well-to-do Americans need worry about federal estate taxes. The estate of an individual dying in 2014 worth less than $5.34 million isn't subject to federal estate taxes, while married couples can leave twice that much without triggering federal estate tax. If you are concerned that your estate will have to pay taxes after your death, you can make property gifts during your lifetime. That first $14,000 to any individual annually isn't subject to tax -- and also doesn't count as part of the lifetime federal estate tax exemption. The IRS allows you to give away up to $5.34 million in your lifetime in taxable gifts without paying gift tax. However, those amounts are reduced from your federal estate tax deduction. For example, if you are a single person and gift your $1 million dollar house to your child, the amount of your estate subject to federal tax becomes $4.34 million.

About the Author

A graduate of New York University, Jane Meggitt writes regularly for various legal blogs. Her work has appeared in LegalZoom, USA Today and many other publications.

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