When you’re considering giving a house to a loved one, the idea of hefty taxes may make you hesitate. At BruegelPC, we understand the complexities involved in such significant decisions. Our experienced team can guide you through the process of potentially minimizing or even avoiding taxes altogether. Let us help you make this generous gesture without financial stress.
As indicated in IRS guidelines, you can gift a house without paying taxes if the value is within the annual exclusion limit, which is $17,000 per person in 2023. Gifts exceeding this limit may require you to file a gift tax return, but you can use your lifetime exemption of $12.92 million. Always check current IRS rules for any updates.
Understanding Gift Tax Rules
Gift tax rules ensure that individuals can’t give away large sums of money tax-free, making them a very important aspect of financial planning.
To put it briefly, in the United States, gift tax rules affect the person giving the gift, not the person receiving it. Usually, the gift giver has to pay any taxes owed. The IRS requires people to report gifts that go over a certain value on their tax return. As of 2021, you can give up to $15,000 per person each year without having to pay gift tax. This limit is known as the annual exclusion amount. If you give more than this amount, you might have to pay a gift tax.
In basic terms, besides the yearly limit, there’s also a lifetime gift tax exemption. In 2021, this amount is $11.7 million per person. This means you can give away up to $11.7 million over your lifetime without paying gift tax. However, any gift over the $15,000 yearly limit counts against your lifetime exemption.
It’s important to keep good records of all the gifts you give to follow the gift tax rules. Not following these rules can lead to penalties and interest from the IRS.
Annual Gift Tax Exclusion Limits
The annual gift tax exclusion limits allow individuals to give a specified amount of money or property each year to another person without incurring federal gift tax.
If you think about it, in 2021, you can give up to $15,000 to anyone without paying gift tax. You can give $15,000 to as many people as you want, and you won’t owe any taxes on those gifts. If you give more than $15,000 to one person, you might have to pay taxes on the extra amount, but there are some ways to reduce or avoid this tax.
Remember, the $15,000 limit is per person. So, if you give $15,000 to four different people, you won’t pay tax. But if you give $30,000 to one person, the extra $15,000 could be taxed.
Also, if you give a gift to your spouse who is a U.S. citizen, you usually won’t pay gift tax no matter how much you give. The IRS decides these limits and they can change each year because of inflation.
It’s good to keep up with the current limits and talk to a tax expert if you’re unsure about gift taxes.
How to Value the Gifted House
In our earlier discussion to value a gifted house, professional appraisers can assess its worth.
To be brief, they will look at the details of the property, where it is located, and the current market to figure out its value.
Another way to estimate the house’s worth is by checking out similar properties in the neighborhood.
Primarily, it’s also useful to take into account any upgrades or renovations done to the house.
Filing a Gift Tax Return
As I mentioned previously you must file a Gift Tax Return if your gifts exceed the IRS’s annual exclusion amount, showcasing the IRS’s ability to track significant wealth transfers.
In other words, the annual exclusion amount is the maximum value of gifts you can give to a person each year without needing to report it to the IRS. In 2021, this amount is $15,000 per person per year. If you give more than $15,000 to one person in a year, you must file a Gift Tax Return.
When you file a Gift Tax Return, you have to report all gifts you gave during the year that are over the $15,000 limit. This includes gifts of money, property, stocks, and other assets. You will also need to provide information about the people who received the gifts and any possible tax deductions.
Honestly, it’s important to file your Gift Tax Return correctly and on time to avoid penalties and interest. The deadline to file is April 15 of the year after you gave the gift. If you don’t file when you need to, the IRS can charge you penalties and interest on the unpaid tax.
Potential Penalties for Unreported Gifts
As we talked about before, unreported gifts can lead to hefty fines and possible legal consequences.
At its simplest, if you don’t report gifts worth more than a certain amount to the IRS, you could face various penalties including fines, back taxes, and legal trouble. The IRS wants you to tell them about any big gifts you receive each year. If you don’t, you might owe taxes on those gifts, along with possible interest and fines.
Not reporting these gifts can also cause legal issues. At the simplest level, the IRS can look into your financial records if they believe you didn’t report gifts or income properly. This could lead to audits, which are stressful, time-consuming, and expensive. In some extreme cases, you might even be charged with tax evasion or fraud.
To prevent these problems, make sure you keep good records of any gifts you get and report them to the IRS as required. Being honest and clear with the IRS can help you avoid serious financial and legal consequences.
The Closing Remarks
Adding to past comments, in conclusion, while it is possible to gift someone a house without paying taxes under certain circumstances such as within the annual gift tax exclusion limit or through certain exemptions, it is important to carefully consider the implications of such a generous gift.
What BruegelPC is advising against is, seeking the advice of a tax professional or estate planner can help work through the various problems that may occur of gifting property without incurring taxes.
References
- Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide by Deborah L. Jacobs, Wiley, John & Sons, Inc.
- 101 Tax Secrets For Canadians 2021: Smart Strategies That Can Save You Thousands by Tim Cestnick, Wiley, John & Sons, Inc.
- The Complete Guide to Real Estate Finance for Investment Properties: How to Analyze Any Single-Family, Multifamily, or Commercial Property by Steve Berges, Wiley, John & Sons, Inc.