Family members often transfer real estate, either as part of their estate plan strategy or simply as a continuation of their legacy and a gift to their loved ones. But one thing many people overlook when transferring property is taxes.
Here are two common scenarios in real estate transfers and the tax implications for each.
Scenario #1: Joint owner
Let’s say you want a family member to automatically receive your property after your death. One easy way to accomplish this is to add them as a joint owner on the deed. Simple enough.
Now let’s talk about the taxes. When you add a joint owner to your deed, the IRS considers this a gift of 50% of your property’s fair market value. If the gift’s value exceeds the annual exclusion limit for that year ($17,000 for 2023; $18,000 for 2024), you’ll need to report your transfer on Form 709, which is a gift tax return. Luckily, there’s a unified gift and estate tax exemption ($12.92 million for 2023; $13.61 for 2024), which means you won’t have to pay gift taxes on anything under or up to this amount.
When one of the property owners dies, their representative must include the fair market value of the remaining owner’s interest in the gross estate. The remaining owner then receives the deceased’s ownership interest along on a stepped-up basis that equals the property’s fair market value. They can then combine this with the basis they received at the time the gift was made, and the combined amount is their total adjusted basis in the property. This number determines gain or loss if the house is sold.
Scenario #2: Real estate gift
On the other hand, if you add a family member to your deed and still keep the right to use your home for the rest of your life, you’ll face different tax consequences. Let’s say you decide to pass down your real estate this way: you gift it to one of your grandchildren but reserve the right to keep living there until you die.
Even though you’re still using it, the IRS considers this a gift. As such, it isn’t tax-deductible. You also can’t claim a loss on the property, even if you sold it for much less than its fair market value. Because of this, taxes relate to the expenditures of the gift, not its savings.
For instance, let’s say you gift a property worth $500,000 and don’t receive any money in return. You’re allowed to gift $17,000 (or $18,000 for 2024) completely tax-free, or $17,000 each if you’re married. Anything above that must be reported on Form 709, the gift tax return. Once again, the unified gift and estate tax exemption likely means you won’t have to pay any gift taxes.
Tax planning in your estate strategy
Making a real estate transfer to a family member requires a lot of careful planning, especially around tax-related issues. If you need someone to help you navigate these challenges, let TaxGlobal match you with a qualified tax professional. We can help you find one unique to your location and circumstances.