Yes; legally you do need to report that transaction, but it's quite unlikely that you'll actually have to pay any taxes on it. Please allow me to explain this, in detail.
Gift and estate taxes are one
of the most difficult areas of the tax law to understand; and for that reason
cause some of the biggest confusion among taxpayers.
Let's begin with the easiest
part. Under existing tax law (as of 2017) each person can
"gift" up to $14,000 in cash or property to any one individual, tax free. They can also give $14,000 each to any number of additional individuals. Thus, taxpayer Jane Doe could "gift" her good friend and her husband both $14,000 in cash, each (which totals $28,000 for the couple). If they had a daughter, Jane Doe could give her $14,000 too (making $42,000 total), if she were feeling generous.
To be clear, the $14,000
gift-tax free amount doesn't increase by family size: a bigger
family just provides for more individuals who are eligible to receive tax-free
gifts. And, obviously, the people don't need to be related to each other -- although if they are related, the same $14,000 gift tax-free limit applies.
Now then, just because
someone receives over $14,000 in a gift in a given year, doesn't mean that they
owe any taxes. In fact, if any taxes were owed on the gift, they would
have to be paid by the gift GIVER, not the gift RECEIVER. Even then, under
the current tax code, every individual has a lifetime amount of gift money /
property that then can give away, without paying taxes on it. Currently,
this amount is set at $5,490,000 for 2017. That's nearly $5.5 million dollars
!!!
But, even where such a large
gift-tax free cap exists, there is still a legal requirement to file what is known as
a gift tax return (IRS Form 709), whenever the gift amount in a year exceeds
$14,000 to any individual. Thus, the Form 709 tax return may well result in no
taxes being due (where the lifetime gifts made to date are under $5,490,000),
but the specialized tax return must still, by law, be filed with the IRS.
Gift tax returns, Form 709,
are not supported by TurboTax. Form 709 does not exist in our software
package, although you can view a blank copy at the following IRS.gov webpage:
https://www.irs.gov/pub/irs-pdf/f709.pdf
Given your self-described
situation, then, this is the course of action we would recommend. Find a local CPA or a
lawyer experienced with Form 709 (the gift tax return) and have it completed
with the full cooperation and consent of your family member who received the house title.
You will very likely be beneath the
$5,490,000 lifetime gift cap (as most people are), and so your only cost will be the actual preparation
fee charged by your chosen tax professional, plus postage to the IRS. Unlike the federal requirement, a
gift tax return is not required to be filed in any state we know of, with the single exception of
Connecticut.
Finally, remember that filing Form 709 is a completely separate activity than recording the change in home ownership (i.e., the deed) with your local county
property recorder's office; and so it is unlikely that you've been given this information before.
But this is how to legally accomplish
and finalize the process that you've already undertaken (transfer of home ownership to a family member), for tax reporting purposes. While it may be unlikely, the IRS has been known in the past to fine and penalize taxpayers who have not filed gift tax returns when they are required to (as many people don't . . . or are simply unaware of the law requiring them to do so).
For additional information on
gift and estate taxes, you can also consult this IRS.gov webpage:
https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
Thank you for asking this important question.
