In some cases, the IRS allows taxpayers to real property as gifts without requiring them to pay taxes on the transfers. Generally, the IRS taxes the donor or the person making the gift but does not impose income taxes on the person receiving the gift. However, when the recipient receives real property as a gift, then the recipient will owe taxes on the gift when selling property, based on fair market value and tax basis.
The general IRS rule is that all gifts are taxable, unless the federal tax code contains an exception to the general rule. The IRS views most gifts as a neutral event for tax purposes. In other words, gifts under the allowable gift limits are neither taxable nor reduce the taxpayer’s tax liabilities. The IRS does provide tax deductions for charitable donations of qualified property. Congress provides gift recipients with favorable tax treatment, and gift recipients do not have to include the fair market value of their gifts or cash value on their tax returns. However, Congress enacted the gift tax laws requiring gift donors to pay taxes if their gifts exceed the annual tax limits.
Current as of February 2011, taxpayers who make gifts of $13,000 or less do not owe federal taxes on those gifts. The gift limit applies to each individual transfer, and taxpayers may make multiple gifts to different donees and avoid paying gift taxes if one donee does not receive property valued at more than $13,000. For example, if Mike gives a gift deed to Jim for Lot A with a fair market value of $13,000, then Mike can also give Joan a gift deed to Lot B without owing taxes. If either sells their lots, then the IRS will most likely impose real estate gain taxes, if the fair market value of their property exceeds the allowable tax limits. Additionally, gifts to qualified charities, to the taxpayer’s spouse, for tuition or medical expenses paid directly to education or medical institutions on someone’s behalf and gifts to political organizations are not taxable, regardless of its fair market value.
Fair Market Value
The IRS uses fair market basis value to determine non-cash gifts. At the time of the transfer, the fair market value of the gift property must not exceed the allowable limit--$13,000 for 2011. This amount determines the recipient’s tax basis for disposition purposes. In other words, the recipient will claim income on the fair market value exceeding $13,000 when selling it. Taxpayers may calculate fair market value with real estate valuations of comparable property at the time the taxpayer makes the gift.
The IRS also allows taxpayers who own property together to combine their taxable gift allowances and make joint gifts without triggering taxation. Taxpayers who make joint gifts can use the federal gift-splitting rule to make nontaxable gifts of up to $26,000 to each donee. Taxpayers who take advantage of the gift-splitting allowance must file an IRS Form 709, even if the gifts' fair market values are less than the threshold. The form provides the IRS with both of their signatures as evidence they mutually consented to the splitting.
Since tax laws can frequently change, you should not use this information as a substitute for legal or tax advice. Seek advice through a certified accountant or tax attorney licensed to practice law in your jurisdiction.
Jill Stimson has worked in various property management positions in Maryland and Delaware. Stimson worked for the top three property management companies in the commercial industry and focuses her career on property building logistics and tenant relationships. She holds a Juris Doctor and a Bachelor of Science in psychology.