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!