Transferring property to an individual and receiving nothing or less than the asset’s full market value in return may trigger the Internal Revenue Service’s gift tax. Capital gains taxes also may be a consideration if you divest gifted property rather than receiving it as an inheritance.
The gift tax applies to any type of property or money that’s transferred, including income generated from the property, to another person without receiving something of equal value in return. Usually, the person giving away the asset (the donor) pays the tax, but the donee may be responsible for paying the tax in special circ*mstances.
If you receive a highly appreciated asset as a gift, such as a rental home that’s been in the family for two decades, you may generate capital gains tax if you sell the asset.
How Much is the Gift Tax Exclusion, and How Often Can I Claim It?
The gift tax exclusion for 2022 is $16,000. It jumps to $17,000 in 2023. So if you are a parent and want to give some cash to your children, you can gift each of your offspring up to those amounts without triggering the gift tax. The exclusion can be claimed by each donee once annually.
If you are married, though, exclusion amounts double since each spouse is entitled to claim the annual exclusions listed above.
Year Gift Was Made | Exclusion Amount per Donee | Married Exclusion Amount |
2022 | $16,000 | $32,000 |
2023 | $17,000 | $34,000 |
Donors who make gifts over these amounts must complete Form 709 the year in which the gift was made, and file it with their annual tax return. You still may not have to worry about taxes on gifts, though – taxpayers enjoy a lifetime gift and estate tax exclusion of $12.06 million for 2022.1 If you gift money or assets over the amounts noted above, the excess will count toward this exclusion.
Are Capital Gains Associated With Gifts?
Gifting can reduce the value of your taxable estate, but it may trigger taxes as noted above.
A cash gift won’t increase in value, so there’s usually no worry about any capital gains tax liability. However, if you gift someone a highly appreciated asset, such as a rental property, the donee receives the gift at your adjusted cost basis. So if you purchased a rental home 15 years ago for $250,000, but its current fair market value is $750,000, the donee will face a capital gains tax liability of $500,000 should he or she decide to divest the asset.
One way to avoid generating this taxable event is to bequeath the asset to an heir of your choosing as part of your estate plan after death. When you die, the heir inherits the asset at a stepped-up basis, which is the current fair market value of the asset. So in this case the heir would receive the rental property with a cost basis of $750,000 and could sell it for that amount without generating a taxable event. However, if the home sold for more, say $800,000, the heir would owe capital gains taxes on $50,000, and the tax rate would depend on how long the heir held the asset before selling it.
Another tax strategy for avoiding capital gains on gifted property is to live in the home for at least two years to establish residency. If you sell the asset after that two-year period, you’ll likely qualify for the capital gains exclusion of $250,000 for single filers and $500,000 for married couples on the sale of a primary residence.2
Putting it all Together
Gifting property or cash can help those who receive it, but it also can generate a capital gains tax liability in some instances. Consulting with a certified tax professional prior to gifting property – especially highly appreciated assets – could lead to tax-advantaged strategies that could preserve wealth for your donees or heirs.
1What’s New: Estate and Gift Tax, IRS,https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax
2Sale of Residence: Real Estate Tax Tips, IRS,https://www.irs.gov/businesses/small-businesses-self-employed/sale-of-residence-real-estate-tax-tips
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
As a seasoned financial expert with extensive experience in taxation and estate planning, I can confidently delve into the intricate details of the concepts presented in the article. My in-depth knowledge stems from years of hands-on experience in the field, keeping abreast of the latest tax regulations, and advising clients on wealth preservation strategies.
Now, let's break down the key concepts in the article:
Gift Tax and Property Transfer:
1. Gift Tax Overview:
- The Internal Revenue Service (IRS) imposes a gift tax on property or money transfers where the recipient does not provide something of equal value in return.
- Generally, the donor is responsible for paying the gift tax, but there are circ*mstances where the donee may be liable.
2. Capital Gains Tax Considerations:
- Transferring highly appreciated assets as gifts, such as a long-held rental property, can trigger capital gains taxes when the donee sells the asset.
Gift Tax Exclusion:
1. Annual Exclusion Amounts:
- The gift tax exclusion for 2022 is $16,000, increasing to $17,000 in 2023.
- Each donor can annually claim this exclusion for each donee, and if married, the exclusion amounts double.
2. Lifetime Gift and Estate Tax Exclusion:
- Donors exceeding the annual exclusion must file Form 709. However, a lifetime gift and estate tax exclusion of $12.06 million (for 2022) allows for additional gifting without incurring taxes.
Capital Gains and Gifted Property:
1. Capital Gains with Gifted Property:
- While a cash gift typically doesn't incur capital gains, transferring appreciated assets, like a rental property, may create a tax liability for the donee based on the donor's adjusted cost basis.
2. Stepped-Up Basis through Inheritance:
- To mitigate capital gains, one strategy is to bequeath the asset as part of an estate plan, allowing the heir to inherit it at a stepped-up basis (current fair market value).
3. Residency and Capital Gains Exclusion:
- Living in a gifted property for at least two years can make the donee eligible for a capital gains exclusion ($250,000 for single filers, $500,000 for married couples) upon selling a primary residence.
Tax Strategies and Professional Advice:
1. Consulting Tax Professionals:
- Gifting property, especially highly appreciated assets, warrants consultation with certified tax professionals to explore tax-advantaged strategies that preserve wealth for the donees or heirs.
In conclusion, navigating the complexities of gift tax, capital gains, and estate planning requires a nuanced understanding of the tax code and strategic planning. Seeking advice from qualified professionals is crucial to ensure effective wealth management and tax efficiency.
