These gifting and inheriting property questions are each separate areas of concern.
1. The Annual Gift Tax Exclusion: You are correct. When person-A writes a check for $19,000 to person-B, it falls under the annual gift tax exclusion for 2025 ($18,000 for 2024). This means that person-A does not need to report the gift to the IRS, and person-B does not owe any income tax on it. The gift tax and filing a gift tax return would be the responsibility of the giver, not the recipient, and it only applies to gifts that exceed the annual exclusion amount.
Here are the key situations where a gift tax return (IRS Form 709) is required:
- When a gift exceeds the annual exclusion limit: For 2025, that amount is $19,000 per person. If you give more than $19,000 to any single individual in a calendar year, you must file a gift tax return.
- When spouses split a gift: If a married couple decides to "split" a large gift to a third party to take advantage of both of their annual exclusions (for example, giving $38,000 to one person), they both must file Form 709 to make that election, even if the amount is less than the total combined exclusion.
- For gifts of a "future interest": This is a special category of gifts, often involving trusts, where the recipient can't immediately use or enjoy the property. These gifts do not qualify for the annual exclusion, and you must file Form 709 regardless of the gift's value.
- Gifts of a terminable interest to a non-citizen spouse: Special rules apply to gifts to a spouse who is not a U.S. citizen, and a gift tax return may be required.
Even if you have to file Form 709, you often won't owe any gift tax. The form is primarily used to track gifts that exceed the annual exclusion amount, which then count against your lifetime gift and estate tax exemption. Since the lifetime exemption is so high ($13.99 million for 2025), most people never come close to paying a gift tax.
2. Property Pass Down & Capital Gains
The capital gain on an inherited property is determined using the "stepped-up basis." This means the cost basis of the property is reset to its fair market value on the date of the previous owner's death. This is a significant benefit to heirs.
- If the heirs sell the property: The capital gain is calculated based on the difference between the sale price and the stepped-up basis (the property's value at the time of the elders' death).
- For example, if the property was originally purchased for $100,000 but was valued at $500,000 when the elders passed away, the new basis is $500,000. If the heirs then sell it for $510,000, their capital gain is only $10,000 ($510,000 - $500,000), not $410,000 ($510,000 - $100,000).
- If the Heirs keep and rent it out: Yes, there are tax implications. The heirs will need to report the rental income on their tax returns. However, they can also deduct many expenses related to the property, such as mortgage interest, property taxes, insurance, maintenance, and repairs. They can also take a deduction for depreciation on the property.
3. Property Taxes
Whether the property tax jumps to the current appreciation rate depends on the state and local laws where the property is located. In most states, a change in ownership, such as an inheritance, triggers a reassessment of the property's value to its current market rate, which would likely increase the property taxes. However, many states do have specific laws that can limit this.
For more information see:
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Please have an amazing rest of your day!
Terri H.
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