Form 709 question regarding the valuation of a home gifted

[melbe]

I gave my non-citizen wife half of my house by putting it into community property, thus it becomes a gift.  In filing out Form 709, I need to determine the value of the house that I am gifting half of.  I am getting an appraisal so I will know the market value, however, I also have a sizable mortgage on the house.  Is the appraisal reduced by the mortgage to determine the gift value?  My wife is now on the mortgage as well as the house.

[Anonymous_]

The value of the gift is net of the mortgage; it would be absurd to gift a liability to another individual.

Thus, deduct the mortgage balance from the market value to arrive at the value of the gift.

[melbe]

Thanks!

[jtax]

Surprisingly this appears to be quite complicated. It seems to be that there are income tax consequences as well as gift tax issues depending upon the donor's basis in the property and whether the mortgage is more than the basis.  Here is an article. This is not simple stuff. I would highly recommend that you seek the advice of an estate planning attorney to help you figure it all out. (CT and MN also appear to have gift taxes that might be relevant).

https://www.jkzllp.com/blog/2019/02/i-give-you-my-heart-and-my-home-gift-and-tax-income-consequences...

Also note that the unlimited gift exclusion for gifts to spouses does not apply to non-citizen spouses. Rather a "super" annual exclusion applies. Amounts over that will just reduce your lifetime exclusion, which is currently very large (> $12M).

"If your spouse is not a U.S. citizen, the marital deduction for gifts is limited to an annual exclusion of $164,000 for 2022. See IRC § 2523(i)."

https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-tax...

[melbe]

Can the annual exclusion of $164,000 reduce the gift?  I am giving half the house to my non-citizen wife so it is community property.  Thus, is the gift 1/2 (market value-mortgage)-annual exclusion?

[jtax]

I would think so, but I think you should ask that question of an estate planning attorney who can give you professional advice and prepare the 709 for you.

I do not understand the income-tax issues with the mortgage, but that article I linked to discusses it. That's what I would be really worried about. I wouldn't be very worried about the gift/estate tax issue unless your estate at the time of your death is likely to be more than $12M (which may change of course). If that's the case then you don't want to give the half of the house in a way that uses up your estate tax free amount. (E.g. perhaps give $164 net gift each year until you've got to your 50% value, or do something with discounts. These are questions for an estate planning attorney).

[Anonymous_]

Yes, you should absolutely seek local legal counsel for this matter.

See https://www.avvo.com/estate-planning-lawyer.html

The annual exclusion for a non-citizen spouse, however, would be $164,000 (for 2022) and would be the amount over which would impact your lifetime exemption.

On the other hand, I do not see much liability in the form of income tax unless the property is highly leveraged. 

[Mike9241]

Spouses who are not U.S. citizens. If your spouse is not a U.S. citizen and you gave him or her a gift of a future interest (the gift you mention was of present interest),  you must report on Schedule A all gifts to your spouse for the year. If all gifts to your spouse were present interests, do not report on Schedule A any gifts to your
spouse if the total of such gifts for the year does not exceed $159,000 and all gifts in excess of $15,000 would qualify for a marital deduction if your spouse were a U.S. citizen. if the gifts exceed $159,000, you must report all of the gifts even though some may be excluded. 

when was she put on the mortgage?