I have a question about gift tax on a real estate gift?

Question

I have a parcel of land I want to give to my daughter and her husband. The county property tax taxable value of the land is $8,744, which in this county (St Clair County Illinois) is one-third of the fair market value as appraised by the county assessor. I don't have a problem with the assessor's appraisal because I know that the actual true fair market value is really more than $7000 higher according to a realtor's appraisal I had done about 9 years ago. I'm sure the IRS, for gift tax purposes, will not dispute the county assessor so I am going to claim the gift value is the county assessor's appraised fair market value of $26,232. The property is deeded in my name only and I already know that the gift tax exemption for a single donor is $12,000 per gift per person per year and so now here comes my question. I want execute a quit claim deed and transfer that property to 2 people, my daughter and her husband jointly. So given the fact that a gift of $12,000 per person per year is exempt from gift tax, does the gift of property valued at $26,232 divided equally between 2 people, deeded to both of them jointly, expose me to a gift tax only in the amount which is the difference between $24,000 and $26,232? Or to accomplish the same will it be necessary to divide the property by executing 2 quit claim deeds, one on the west half to my daughter and one on the east half to my son-in-law (or vice versa), and then let them add one another to each of the other's deed? What I want to avoid is exposure to a gift tax which would be the excess difference between the exempt $12,000 per person and the gift value of $26,232.

Answer 1

Your gift tax form needs to reflect a valid appraisal.  A tax appraisal is of last resort.  Intentionally low-balling the amount can lead to a situation where your gift tax form never has a statute of limitations.  

The gift tax is overrated, unless you have an estate of more than $1Million, you won't actually ever pay any gift tax.

Note, the gift tax covers the FMV--but not the capital gains.  When your daughter sells, her gain will be based on your basis.

"then I can do a low ball sale on the deed to close the gap between the $24,000 exemption and the $26,232 value of the parcel "  Yeah, if you can defend the $26,232 price (GET AN APPRAISAL), then yes, you can sell the property to them for $2,232 and squeak by.  Personally, I'd make them pay $6,232 to allow sufficient wiggle room if audited.

Answer 2

Gifting each of them an undivided 1/2 interest in the property effectively reduces the gift to 1/2 of the total value of the property to each recipient so in your case the only portion subject to Gift Tax reporting would be the $2,232.  That's really a moot point however since it would be shielded from tax by the lifetime $1,000,000 unified exclusion so no tax is due.  The unified exclusion does reduce the Estate Tax exclusion dollar-for-dollar but with such little in play there is likely to be little impact ever.

While the IRS does expect the value to be based upon Fair Market Value, if you have a current appraisal in hand at $26k it's highly unlikely that they would ever raise an issue given that appraisals are as much art as science.  And, with the current state of the real estate market in most of the country it's entirely possible that the value has dropped below $24k rendering the Gift Tax totally irrelevant.  If we were talking about a property with a 6 figure value there would be issues to deal with, but as you are so close to the annual exclusion amount it just isn't an issue.

While the best defense against IRS claims is a formal appraisal, I would probably get a market analysis from a Realtor first.  If that comes in close to $24k, I'd be very comfortable with calling it $24k and forgetting about the Gift Tax entirely.

One thing that will come in to play for the recipients is the pass-through basis.  Make sure that you give them documentation of what YOU paid for the land since when they sell it, that is the basis that they will have to use. That could be a moot point if they build a home on it and live in it as their principal residence since they'd probably qualify for the exclusion on the sale of a principal residence however if they hold it for investment purposes they will be looking at capital gains tax when they sell the property.

Answer 3

The number the county assessor puts on the property is an ASSESSMENT, not an appraisal.  The number you need to use is the fair market value, not the assessment.  Assessments might or might not be anywhere close to fair market value, and in your case it sounds like it isn't.  When was the appraisal done?  Values do change over time, whether the appraisal does or not.

Yes you can split the gift, effectively increasing the annual limit to $24,000.  And if you gave them half interest one year, then the other half the next, that might take care of the gift tax reporting requirement assuming that the true FMV was under $48K.

You do realize that if you give this to your daughter as a gift, she takes your basis, so you end up sticking her with a bigger tax bill if and when she sells it that she'd have if she inherited it?  Of course if your estate is over the limit to pay estate tax, that would also be a consideration.

Answer 4

Your old appraisal is worthless, and the county appraisal of only slightly more value.  You need a more current value, preferably a valid appraisal by licensed appraiser, but at least a current market analysis by realtors.

Answer 5

I'm sure you are already aware that there are many advantages to holding the property and transferring it to your daughter as an inheritance.  You could also do a fractional transfer that equals the gifting limit and take two years to transfer the full parcel if that works for your family.

I'd confirm your reliance that the IRS "won't dispute the county assessor" just to be sure you have the property valued correctly, and then you can transfer to them jointly and use the double gifting limit.