Gift a House

[kirkyone]

I am filling out a Form 709 for gifting a house.  What does the IRS require to prove the value at the time of the gifting (Quit Claim Deed)?

[Anonymous_]

An appraisal from a certified appraiser is the only indicia of fair market value that the IRS must accept.

[jumicircle]

The reason IRS wants a valuation is because there is a gift limitation without tax.  That amount for 2022 is a mere

$16,000. Anything above that is subject to tax.  If you were to give it to the person as a part of your estate (when you die) the limit of no tax is 12 million dollars.

What you might consider is gifting the person in stages so that no tax is required.  For example... Let's say the house is worth $160,000 you could gift $16,000 this year and then the same amount for another 9 years (it won't really be that long because the exempt amount goes up nearly every year).

And you will not have to complete the form 709!!!

With all that said....  If you don't care about the tax paid and it isn't a burden on either you or the recipient, then just go ahead and gift it...

[Anonymous_]

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@jumicircle wrote:

What you might consider is gifting the person in stages so that no tax is required.  For example... Let's say the house is worth $160,000 you could gift $16,000 this year and then the same amount for another 9 years (it won't really be that long because the exempt amount goes up nearly every year).

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No, the annual exclusion does not go up every year. It was $15,000 for four years and then $14,000 for the four years prior to that.

Regardless, I cannot think of anything more ridiculous than gifting one-tenth of a house each year for ten years. It is simply absurd and an appraisal is still needed for the total fair market value at the time of each gift. 

[sandy4042]

@Anonymous_ Yes, I think the OP already has thought through gifting the house pros/cons if they're already at the point of filing the 709 (i.e., they've already gifted it).  The advantage of the quit claim deed to a family member is the property tax remains the same for the family member/new owner.

[Anonymous_]

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@sandy4042 wrote:

The advantage of the quit claim deed to a family member is the property tax remains the same for the family member/new owner.

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Yes, I understand that. FYI, I have drafted quitclaim deeds, recorded quitclaim deeds, and handled real estate closings for numerous clients. You should note that a quitclaim deed would not alter the assessed valuation if there is no consideration paid (regardless of the relationship of the grantor to the grantee).

Thanks for the information.

[VolvoGirl]

Another thing to consider is when you gift a house they also get your cost basis.  They don't get a step up in value like by inheriting it.  It is better to inherit it.

[sandy4042]

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@Anonymous_ wrote:

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 You should note that a quitclaim deed would not alter the assessed valuation if there is no consideration paid (regardless of the relationship of the grantor to the grantee).

Yes, that is the key to the property tax remaining the same...the assessed valuation is not altered.  You are the one with the experience; I just googled on quit claim deed due to it coming up in conversation with a person handling her mother's estate and this question.  I wish I had known about it, like 10 years ago, it may have given my family more options to consider with my mom's house when she had to move out.

[kirkyone]

Thank you for the information about using a certified appraiser.  That makes sense.  The idea that I would avoid a tax event by staying under the annual gifting limit seems absurd, only in that I'm allowed to gift $11.7 million in my lifetime.  My understanding is there is no tax event, only the required Form 709, so the IRS can keep tabs on your lifetime total.

[sandy4042]

@VolvoGirl 

Another good point to consider.  But if the person who receives the house, moves in and it becomes their principal residence isn't the gain excluded from taxes when they sell it?  Quit claim deed seems perfect for if you want to give a property to a family member who's going to live there, and you give it to them because you want to keep it in the family.

[macuser_22]

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@sandy4042 wrote:

@VolvoGirl 

Another good point to consider.  But if the person who receives the house, moves in and it becomes their principal residence isn't the gain excluded from taxes when they sell it?  Quit claim deed seems perfect for if you want to give a property to a family member who's going to live there, and you give it to them because you want to keep it in the family.

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Not necessarily,

You can sell your primary residence and be exempt from capital gains taxes on the first $250,000 if you are single and $500,000 if married filing jointly.    However, capital gains is the difference between your basis in the property and the sales price.   Inherited properties basis for beneficiaries  steps up to the market value on, the date of death while gifted property maintains the deceased basis.

The difference can be huge: for example, if the original owner paid $100,000 for a property 40 years ago and it was worth $2,000,000  when they died and the beneficiary sells it for $2,500,000 the capital gains would be $500,000 if inherited but $1,900,000 if gifted.     For married filing jointly the inherited home would be tax free after the $500.000 exclusion but the gifted home would have $1,400,000 of taxable gains.

[sandy4042]

The capital gains exclusion on primary residences have really not kept up with the housing prices.  I noticed the $250,000/$500,000 was set in 1997.  It would still cover many middle class Midwest houses now (including mine and my late mothers) but I doubt it for some housing markets.  Probably lawmakers should re-examine the intent of the exclusion and up the amount accordingly, indexing for various housing markets if need be.

[Carl]

The reason IRS wants a valuation is because there is a gift limitation without tax. That amount for 2022 is a mere

$16,000. Anything above that is subject to tax.

That statement is just wrong.

Any gift given by any one individual to any other individual is required to be reported if the value of the gift given in 2021 exceeds $16,000. It's merely a reporting requirement.

Tax only comes into play when the total of all gifts given by an individual to another individual exceed $11.7M (eleven million seven hundred thousand dollars). Chances of that happening with your ordinary tax payer are small.

When gifting real estate, the value of the gift given is basically what the giver originally paid for it, plus the cost of any property improvements paid for by the giver. Depending on the type of real estate, other things may come into play also in determining the value of the gift.

[Anonymous_]

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@Carl wrote:

When gifting real estate, the value of the gift given is basically what the giver originally paid for it, plus the cost of any property improvements paid for by the giver.

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That would be the basis of the gift in the hands of the donee, not the value of the gift.

[macuser_22]

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@sandy4042 wrote:

The capital gains exclusion on primary residences have really not kept up with the housing prices.  I noticed the $250,000/$500,000 was set in 1997.  It would still cover many middle class Midwest houses now (including mine and my late mothers) but I doubt it for some housing markets.  Probably lawmakers should re-examine the intent of the exclusion and up the amount accordingly, indexing for various housing markets if need be.

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Where I live the house next to me was purchased in 1971 for $30,000 and sold recently for $2,700,000.