What to do about gift taxes

Question

I'm new to the investing world and I am getting my start because of a generous family member. They are gifting me property free and clear of any debt, and we are going to refinance the property and take on a loan to pay off all of our debt and use the remainder to start investing in property. But we are running into a problem with gift taxes. The total amount of the gift is going to be about 250k to 300k. What can i do to minimize the gift tax or prevent it entirely? I am trying to find professional help in my local area to answer these questions but i can not find anyone that will respond to my inquiries, since i work Monday through Friday my only option is email or voicemails since no one seems to work weekends!

Side note if you were a legal or financial professional you would make a killing if you worked on the weekends around my area. It is very frustrating not being able to talk to someone during the times that I have available.

I say that as a complete double standard since i myself work Monday through Friday as a insurance professional and i try not to work weekends, but still!

Now back from my rant, if you know anything that could help please let me know. and if you are a professional that could help me in my local area please let me know!

I appreciate any help you have to offer in advance!

Brandon Hall · Answer

@Chris Marshall gifting an entire property is usually not a good idea. In these situations, we try to get creative like @Jerry W. is suggesting.But worst case, the gift tax is not the receiver's problem but is the giver's problem. Even then, one can gift up to $5.43MM without having to worry about actually paying any tax.

Jerry W. · Answer

You need an accountant @Brandon Hall might be on also. Usually the gift tax is paid by the estate who gives it away, as it goes on their tax return. Several things can reduce it, like using the yearly gifting. Say give you $14K now and $14K in January, you have $28K given tax free. If you and the person gifting are married he can gift you $14K, your wife $14, his spouse can gift you $14K and your spouse $14K for a total of $56K tax free now then do same thing again in January, for a total of $112K tax free. You have them sale you the place for $250K then have them forgive that amount of debt via a letter each time they do it. Does that help for fast way to reduce the amount? That doesn't include if they use some of their gift/inheritance credits up in the transfer.

Jerry W. · Answer

@Marco G. it is a UNIFIED gift and inheritance tax. The tax in on both with one total amount of credits you can use. You can spend your credits doing large gifts while you are alive, but use any unused credits to pay inheritance taxes. Ex. you have $5.43 million in credits, you can gift $1million to your child now, so when you die you have $4.43 million in credits left. If your estate had $5 million in it you would pay inheritance taxes on $ .57 million. If you gifted $2 million while alive, on your death your estate has $3.43 million in credits to use before you pay inheritance taxes.This is a VERY simplified answer, but hopefully it helps.

Fulton Sanchez · Answer

Before rushing to gift the properties and pay a huge gift tax bill in addition to the future capital gain tax you will pay when you sell the property if there is substantial appreciation. It's better for the owner to keep the property until his death so you can take that basis (purch price + addtions+ etc). In the mean time you can put the property in a trust with retained powers and save both in gift tax and capital gains tax.

Matthew A. · Answer

I hope one day, i'm rich enough to say I had to actually pay tax on my gifts.

Steven Hickox · Answer

Dear Jesse: Your cpa is right. When you receive a gift from a person in excess of $14,000 per year the person making the gift must file IRS form 709 which reports the gift. No tax is due unless the total reportable lifetime gifts is more than $5.45M (very unlikely). Estate and gift taxes are unified meaning that you have a combined gift and estate tax exclusion of $5.45M. Therefore if you give away $5.45M during your lifetime then your estate would be subject to estate tax on your death. Clear?

Chris Marshall · Answer

Marco G. I think Brandon Hall was suggesting I defer the gift tax onto the estate tax, and as long as their total estate tax never goes over 5.43 million after they pass they never actually pay the gift or estate tax? Is that correct?

Jesse M. · Answer

My CPA told me, as long as the gifter doesn't go over their lifetime exclusion limit (2016 - $5,450,000), no tax will be owed. I hope she's right.

Chris Marshall · Answer

Brandon Hall Jerry W. thank you all for helping me out and I appreciate it all. I would still be years away from where I am now without bigger pockets!

Marco G. · Answer

Brandon Hall are you referring to the estate tax when you say $5.43M? That's a little different from his question as I understood it.