Gift Tax In Real Estate: How It Works

If you want to help a family member or friend with a down payment or perhaps sell them your property at a discount, the IRS considers this a gift. Under certain circumstances, this makes the transfer of the funds or property subject to gift tax.

Although this isn’t meant to be personalized tax advice, we’ll give you a look at the ins and outs of gift tax and ways to avoid it. Please consider speaking with a tax professional about your unique situation.

What’s The Gift Tax?

The gift tax is paid anytime a gift is given in theory. It’s important to note that you don’t necessarily have to be giving something away. It’s considered a gift by the IRS anytime something is sold for less than fair market value.

This is important because if you sell a property at a discount to someone, it’s considered a gift of equity. The difference between the purchase price and the appraised value would be taxable.

As a practical matter, the likelihood of actually paying gift tax isn’t high for most people. There are both annual and lifetime gift tax exclusions. Additionally, gifts to spouses who are U.S. citizens aren’t typically taxable.

What’s The 2024 Gift Tax Exclusion?

For the 2024 tax year, the annual gift tax exclusion is $18,000. This is adjusted periodically subject to inflation. It’s worth noting that if you want, you can gift up to the annual limit to as many people as you want without having to report the gift.

How Much Can You Gift Tax-Free Over A Lifetime?

For individuals, that exclusion in 2024 is $13.61 million. Because married couples can pass unused exclusion amounts to the surviving spouse, a married couple has the combined ability to donate up to $27.22 million not subject to estate tax.

The Tax Cuts and Jobs Act initially set this higher than it was previously for the years 2018 – 2025. If the act isn’t extended, the threshold for taxing estates would be $5 million (the equivalent of $10 million for a couple), adjusted yearly for inflation. The IRS has said that those who have made large gifts under the guidelines currently in effect won’t be penalized.

How Does The Gift Tax Work?

If you make a gift in excess of the annual exclusion limit, it needs to be reported on Form 709. Any gift you make above that amount counts toward the lifetime exclusion, so the IRS wants to know about it. If both you and your spouse make a gift, there’s no joint gift tax form. You would both fill out a Form 709 for that year.

You would pay the gift tax if you have an estate or made gifts in excess of the lifetime exclusion in place when you pass away.

Who Pays The Real Estate Gift Tax?

In general, the donor pays the gift tax. If the donee agrees, they can pay the tax under a special arrangement. If you’re considering the latter, consult a tax professional.

How Much Is The Gift Tax?

The gift tax rates for 2024 are below. When reading this, it helps to know that the U.S. has a graduated tax system. So the taxable income builds upon the last bracket until you get to the bracket that applies at your estate tax level. The best way to explain this is with a quick example.

Let’s assume you’re left with $40,150 in taxable gifts beyond the lifetime exemption. For the first $10,000 of those gifts, you’re taxed at a rate of 18%, which comes out to $1,800. Between $10,001 and $20,000, the rate is 20%, which is $2,000. Between $20,001 and $40,000, the tax rate is 22%, or $4,400. The last $150 would be charged a 24% tax rate, which is $36. Adding this all up, your total tax liability should come to $8,236.

The IRS makes this all very easy because the equation used to calculate the appropriate amount is always included in the tax table, replicated below:

How To Avoid The Gift Tax For Real Estate

If you’re looking to avoid paying gift tax, there are several ways of going about this that would limit your liability.

Gift The Property To A Spouse Or A Dependent

As noted prior, you don’t pay gift tax on property transferred to spouses who are U.S. citizens. Even if your spouse isn’t a citizen, you only have to report total gifts exceeding $175,000 in any given year.

You can also gift up to the annual exclusion amount to a minor each year, and it’s as if they have control of the funds in the present even if they can’t access it until no later than age 21. This is important because ordinarily you can’t exclude property that someone will only have access to in the future under the annual exclusion amount.

Split The Gift

It’s possible for you and your spouse to split the gifts. The easiest way to do this is two separate checks. If they are over the annual exclusion limit for both of you, when you file the report, the IRS requests that you both fill out Form 709, but that they be put in the same envelope for paperwork purposes.

Alternatively, your spouse can sign a consent form giving up their right to give a gift so that you can make a bigger gift of between $18,000 and $36,000 without having it count toward your estate.

Spread Gifts Out

If it’s a situation where you want to give money for a down payment, but you have a few years, you can spread out the gift over time so that you’ll only give up to the annual exclusion limit. This way, you maximize the amount you give without touching your future gift or estate tax liability in terms of the lifetime exclusion.

Monitor Your Estate Plan

If you’re looking to do this in the most tax advantageous way, the best thing to do might be to speak with a certified financial planner or tax preparer about life estate planning. They’ll be able to holistically look at your financial situation and work with you to minimize your liability while maximizing the assistance you can give to those whom you give gifts.

The Bottom Line

Gift tax is generally paid by the donor, but they’ll still want to minimize exposure. There’s a lifetime exclusion of $13.61 million per person for the 2024 tax year. Additionally, for gifts up to $18,000, you don’t even have to file a gift tax return, so these don’t count toward the exclusion. You can minimize liability by splitting gifts or spreading them out, among other strategies.

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