Can you gift part equity of a home each year to avoid gift tax?

Question

Question for RE / tax gurus:

If a property is worth $100k, can two parents gift 50% equity of a property to their child and their spouse in one calendar year (2018), and the remaining 50% of equity the following calendar year (2019) and legally avoid the annual gift tax limit ($56k) while essentially gifting a home to their child over this timeframe?

What is the right way to go about doing this, if possible?

Dave Toelkes · Answer

For a $100K gift, most likely there won't be a gift tax unless the parents have already made lifetime gifts is excess of $11.18 million. Exceeding the annual gift tax exclusion only requires the parents to file a gift tax return. The gift tax return is an information return with no actual tax paid. Instead, the amount exceeding the annual exclusion is deducted from the lifetime exemption which is $11.18 million in 2018. When the total of all gifts throughout the giver's lifetime exceeds $11.18 million, will an actual tax be assessed on the amount exceeding the lifetime exemption.

For most, an outright gift for the full $100K amount won't be a taxable event.

Frank Chin · Answer

No tax guru, but we done that through the help of an attorney. In our case, the gifting occurred over three years rather than two, to stay within the annual gifting limit.

What he did was prepare notes for myself and my wife to sign. If it was over two years, and done this year, I will execute two notes one for year 2018, and one for year 2019. Similarly my wife will execute two notes.

We done that in the early 80's. If done today, the way he arranged it, one set of notes will be dated 12-31-18, the other set 01-01-19. Then my mom in law who has title will sign two letters date 12-31-18 and 01-01-19 forgiving the notes. That will be the documentation backing the gifts. The title was signed over to us.

In our case, there's a third note, if done now, would be dated 01-01-20. He explained that to be legal, the notes should contain interest, if not, the IRS will impose imputed interest. Because of the way the notes are created, and forgiven, even though it contains interest, the first two was forgiven immediately, thus no interest due. That's why it was done year end with notes dated 12-31, and 01-01. For the record, the third note has interest which ran a year, we issued a check to her, where upon she issued a check back to us for the same amount calling it a Xmas gift.

This is the basics, and how we did it, as the attorney explained to us.

Account Closed · Answer

@Aaron Hunt Good question. One basic principal of gift tax is that the donee (yourself) will never owe gift tax. Gift tax is paid by the donor (in laws) but only once the life-time limit has been exceeded. With proper planning gift tax can be avoided through use of the annual exclusion ($15,000 per person, per recipient in 2018, first increase in 5 years).

There most likely will be tax consequences if you sell after receiving the gift depending on the original basis (purchase price) of the donor.

Aaron Hunt · Answer

Thanks Josh! Appreciate the information.

We won’t be selling, but instead plan to tap into the equity to split with the other siblings, and keep a HELOC open for any future investments we wish to pursue.

Most likely we will let the cash flow pay any borrowed money back down and include it in our future estate/trust and pass it down to our children as a gift from their grandparents.

Basit Siddiqi · Answer

@Aaron HuntYou can't gift a part of a property to someone. please correct me if im wrong. Person A can't say I gift $15,000 of a property to another person.

What some people do is they put the property they want to gift into an LLC and then gift units of the LLC to the recipient.

Example if 5% of the property is $15,000 then they give 5% of the LLC units.

But like others have mentioned - if the donor is not likely to have an estate near the lifetime exclusion amount - then there doesn't appear to be any harm with gifting it all in one year.

Frank Chin · Answer

You'll need an attorney that is also conversant with estate planning. What works overall is the size of the estate and what the goals are for the donor and donee.

Back then we could have chosen to use the lifetime limit for gifting. But years ago, the lifetime limit was much lower than today. My mom in law's objective is if she lives too long, almost all of her assets must be depleted if she gets sick and she has to go on Medicaid. When we did it, she was 69 years old, and today she is 93. There's a five year lookback to the gifting, for Medicaid purposes to not count assets gifted, we figured we do it while she's still healthy. And we want to have it as part of our real estate portfolio to rent out, sell and get something larger. So putting the property in a trust while workable for her, has some benefit for tax purposes, not so flexible for us.

The attorney we use is knowledgeable in estate planning, real estate and taxes.

Aaron Hunt · Answer

So...ironically the place is in Charlotte, NC.

Any recommendations for an investor friendly RE attorney who could help us get this done?

Frank Chin · Answer

@Basit Siddiqi, when I was doing real estate investing, bought a foreclosure condo for my sister to live in, started off gifting her a 40% stake, so that way it was written down on the deed, it reads: My name 60%, her name 40%.

Then I was going to gift her another 30% later on, so I'm told I can file a new deed, i.e. My name 30%, her name 70%. It's joint tenancy with right of survival.

The way it was done, didn't involve LLC's at all.

Aaron Hunt · Answer

Ah, got it! Was not aware of how this works. Thanks for explaining. They won’t be anywhere near those limits so I guess it should be okay.

I was trying to determine if it’s okay to do it in one go...quit claim deed to us and done. Or if its better to split the equity up (which I assumed was safer).

Last thing I want is for them or us to be slammed with some tax we were not prepared for. After all, they’ve gained appreciation on it, and depreciated the property over the past 28 years of ownership.

Aaron Hunt · Answer

This is amazing. Thanks for explaining.

So we’ll probably do somethinng similar then. Note written & forgiven on 12-31-18 and next note written and forgiven on 1-1-19.

My in-laws want to offload a paid off property worth ~$100k to myself and my wife.

Can you gift part equity of a home each year to avoid gift tax?

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