Joint Tenancy and Gift Tax question

[sh62365]

My sibling and I acquired a property in California in 2016, with joint tenancy and right of survivorship. My sibling is the primary residing person. We did a total downpayment of 80 K with me doing 20K and sibling doing 60K. Rest of the property amount paid through mortgage. Does any of us have to file a gift tax return and if yes for what amount the gift tax return is to be filed?

[GeoffreyG · Accepted solution]

The answer to your question is that you do have some gift tax consequences related to this transaction, and that your sibling should file a Form 709 (federal gift tax return), reporting a total of $6,000 as a gift made to you.  Please allow us to explain how we arrive that that figure.

Under estate law, joint tenancy is a special type of ownership by two or more persons of the same property.  The individuals, who are called joint tenants, share co-equal ownership of the property and have equal, undivided, rights to keep or dispose of the property.  Joint tenancy also creates a Right of Survivorship.  This right provides that if any of the joint tenants dies, the remainder of the property is transferred to the survivors.

Treas. Reg. § 25.2511-1(h)(5)) explains that the transfer of money or property to another party (related to the taxpayer or not) constitutes a gift.

Because joint tenancy creates co-equal owners in the property, and there are exactly two of you, each of you essentially now own a 50% equity interest in the property.  With an initial total cost (down payment) of $80,000, that means you each made an initial $40,000 as an equity investment.

However, you indicate that you contributed $20,000 of this $80,000 total amount, leaving some $20,000 that should be considered an effective "gift" to you on the part of your sibling, in order to equalize the investment at 50% / 50%.

That said, each taxpayer is allowed to give $14,000 per year (in 2016) to another person completely free of gift tax implications.  Thus, $20,000 - $14,000 = $6,000 is the derived amount of the gift, to you, that becomes a reportable item on the part of your sibling.

Please keep in mind that this $6,000 is not actually a taxable sum in itself, as the $6,000 will simply count toward reducing you sibling's lifetime Unified Gift and Estate Tax allowance (which in 2016 is nearly $5.5 million).  Nevertheless, there is still a reporting obligation, even in the absence of any taxes due, that legally should be met by filing Form 709.

Finally, please note that the gift tax return, Form 709, is not supported in the TurboTax software; and that your sibling would need to prepare it independently of TurboTax.

Thank you for asking this important question.

[sh62365]

Thanks for the quick reply. Actually the transaction took place in 2015 so we should have filed in 2016. Can we still go ahead and file Form 709 now without penalties? Does the actual value of the property matter at all in this case or is it just the down-payment we made?

Also I have been paying my sibling some money (more than 14K in 2016) and the mortgage repayment is done entirely by my sibling. Can my sibling go ahead and claim the entire Mortgage Interest and Property Tax as deductions?
I will go ahead and file Form 709 for the money I sent to my sibling in excess of 14K. Thank you.

[GeoffreyG]

Hello sh62365:

Thank you for your additional comments and questions.

Although it may be a year late, you should still go ahead and File Form 709.  It is highly unlikely that the IRS will assess any penalty for a late filing.

To the extent that either one of you pays more than half of the cost of the joint tenancy property costs each year, including both mortgage interest and property taxes  (less a $14,000 annual allowance amount, as explained in my original answer), then under the estate and gift tax rules, a "deemed gift" is considered to have been made . . . and thus the need for filing Form 709 is once again invoked.  In other words, if this arrangement turns out to be a yearly practice, you technically will need a new Form 709 each year.

Finally, when a property is jointly owned by more than one individual, the following rules apply:

•       For unmarried couples and individuals, each taxpayer can only claim the portion of any expenses, such as mortgage interest or real estate taxes, that they actually paid

• For a married couple filing separate returns, they can chose to allocate real estate taxes and mortgage interest expenses between themselves, in any manner they choose.

Thus, in your case of joint property ownership with your sibling, the deductions for mortgage interest and property taxes rest with the one of you who actually writes the checks for these items . . . even if the money used to pay those costs was "gifted" to one or the other sibling.

Thanks again.

[sh62365]

Got you. Thank you very much for the clarifications Geoffrey.

So in our scenario, we both have to keep filing form 709 every year. The reason we are doing this arrangement is it is tax beneficial for one of the sibling who can get the maximum deductions by paying the entire mortgage and property tax rather than splitting.  Do you think it may be problematic with IRS thinking that we are doing this arrangement to get more tax benefits, though I feel we are following the rules fully.

Joint Tenancy is complicated!!

[GeoffreyG]

Hello again, sh62365:

Joint Tenancy ownership of property can indeed be complicated, as experienced accountants and attorneys will be quick to tell you.

But it seems like you and your sibling have a pretty good grasp of what's going on now, and you know the necessary tax forms to file.  In my opinion as a CPA, I don't believe that the IRS will have any problems with your arrangement whatsoever, in terms of one sibling taking the entire deduction for mortgage and property taxes, so long as the gift tax reporting rules explained elsewhere in this answer are adhered to.  In fact, after you do this for more than one year, preparing and filing Form 709 should become fairly routine (as it will be substantially the same disclosure each year, assuming your arrangement continues).

Good luck!

[taxmenow63]

My question is, if one is paying a mortgage, one does not actually fully own the property. Why is a gift tax being levied, other than governmental greed? It seems like I should not have to pay this, when I haven't even completely paid for the property . . .

[Lizeruva]

Hello,

Quick related question. I have a similar situation with purchasing a property with my partner who will be providing about 2/3 or down payment and monthly payments vs my 1/3. From above, it seems we need to file gift tax for the discrepancy. Will this stop or negate when we get married in a couple of years?
Thanks for your help!

[KrisD15]

"it seems we need to file gift tax for the discrepancy." 

Not Necessarily. 

The original post talked about purchasing property as "Joint Tenancy with Right of Survivor". This means that, right off the bat, they each own 50% and if one passes, that percentage of ownership goes to the person left. The survivor would then own 100%. 

Because of this type of ownership, and since they each did not evenly pay at purchase, the person that paid more, in the case above, was obligated to file a "Gift Tax" return.

It is possible you and your Partner will purchase property a different way. 

You would need to find out what type of ownership you stipulated on the deed. The Title company should be able to tell you. 

Laws on Real Estate are governed by the State, not Federal, so there is no golden rule.

If you have not yet purchased, it would be a good idea to speak with a Real Estate Attorney in the state you will purchase.

IF it IS "Joint Tenancy with Right of Survivor" split the cost 50/50. Take that 50% amount and subtract it from the larger contributor. THEN for 2021, subtract 15,000. The result would be the gift tax that would need to be reported. 

For example, say you are buying a house together with your Partner, the down payment is 120,000. You pay 40,000 and your Partner pays 80,000.

You each now have 60,000 in equity in the house. so in essence Partner GIFTED you 20,000. 

In 2021, Taxpayers can gift up to 15,000 with no reporting necessary, so Partner would need to file a Gift Tax Return. 

If you purchase with a different type of ownership, there may be no gift tax however you may not have 50% ownership. 

FOR EXAMPLE, same scenario as above, but deed is "Tenants in Common". You only paid 1/3 and Partner passes. Partner's 2/3 ownership MAY be inherited or contested by a family member. 

This does NOT mean there will ever be tax on a gift unless it puts Partner's lifetime gifting over 11.7 MILLION.

NO, 

Once a couple is married, there is no gift tax reporting between the two, only for gifts they make to others. 

IRS Link about Gift Tax

[michi11]

Daughter and I purchased a home jointly in 2019 and this is her primary residence.  I made the down payment of $45K and she made the mortgage and tax payments.  She refinanced the home in 2021 taking my name off the deed/title using a quitclaim deed and no money changed hands.  Based on what I have read, my daughter should have filed a 709 claiming a gift to me of $7500 ($22,500-$15,000), right?  Moving on to the quitclaim in 2021, do I need to submit a 709 since no money changed hands and if so, is the gift to her 50% of the equity?  The house was purchased for $225K and has a fair market value of $260K at the time the house was refinanced.

[Vanessa A]

Yes, you would need to file form 709 for the gift tax.  You gave the gift to her since your name was taken off the deed, she did not give it to you, so you gave her your interest in the house.  

I am not sure where the $15,000 came from.  The $22,500 I am assuming is half of the $45,000?

[michi11]

The down payment was $45K which I paid in 2019.   My understanding based on earlier replies is that in a joint tenancy (in this instance between me and my daughter) that my daughter should have filed a 709 in 2019 claiming half the down payment ($22,500) as a gift to me.  If I gifted my interest (equity) in the home to her through a quitclaim, I would claim 50% of difference between FMV and the purchase price as the gift.  Is this correct?

[DianeW777]

The year of purchase was a joint tenancy as you indicated, your name as well as your daughter was on the deed at that time.  For this reason there is no gift tax return required in that year (2019).

Fast forward to the current year, 2021.  In tax year 2021, your daughter refinanced, took your name off the property, which you allowed her to do.  There is no mention of whether she paid you back for any of the down payment. Therefore, a gift tax return may need to be completed for tax year 2021 if she is not required to pay you back for the down payment.  This would mean that you gifted her the money in 2021 for the down payment you provided and now gifted to her.

I understand your calculation however you enter the entire gift of $45,000 and the annual exclusion is $15,000 for 2018, 2019, 2020 and 2021.

Due to the lifetime gift tax exemption amount of $11.7 million in 2021, there will be no tax due, however a return must be filed because the gift was greater than the annual exclusion of $15,000.  

Lastly, depending on what was actually in writing or agreed upon by you and your daughter, fair market value of half the property could come into play.  I advise seeking the advice of legal counsel specializing in gift tax law.

[sdsmith1221]

Hi, if you don't mind, I have a similar question. I am moving for work, and I was looking to purchase a house. My partner (whom I have been living with for 3 years, and will be moving with me) is interested in buying ownership in the house through the down-payment. They want to purchase $30,000 worth of equity of the house. I am taking a mortgage, solely on my own, and paying the remainder of the down-payment myself, and will own the percentage of the house accordingly. The bank lending me the mortgage wants me to file my partner's portion of the down-payment as a gift. Is this a gift just for purposes of the lender accounting for money towards the house, or is this also a gift in IRS terms? Even though she is buying a percentage of the house and I don't ever really receive or own anything?

Thanks for any help and insight!

[GeorgeM777]

No, this does not appear to be a gift.  Moreover, according to how the IRS defines a gift, this also does not appear to be a gift.  According to the IRS, you make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return.  If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.

In your description, you say that your partner is interested in buying a percentage of the home.  Depending on the percentage the partner owns, if the down payment reasonably equals the partners percentage interest in the home, then under IRS guidance, no gift has been made.  However, as noted above, if your partner should receive a percentage interest in the home that exceeds the value given (i.e., the $30,000 down-payment) then there may be a gift for the value received that exceeds the amount paid.  

@sdsmith1221