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How to Avoid Gift Tax on Real Estate: 5 Things to Know

The gift tax on real estate is a good argument for why estates aren't transferred over until someone passes. Giving a piece of valuable property as a gift carries huge taxes, far more than when someone gets property in a will. However, with a few tricks, you can avoid massive fees.

The gift tax on real estate is a good argument for why estates aren't transferred over until someone passes. Giving a piece of valuable property as a gift carries huge taxes, far more than when someone gets property in a will. However, with a few tricks, you can avoid massive fees.

Any time that you give cash or assets worth more than $15,000 to someone in a year, you have to pay federal taxes. While most people aren’t transferring this kind of cash to even their closest friends and family, it comes up a lot when a home or property is given to a family member. If the hefty gift tax isn’t paid, an even heftier fine and penalty will follow.

A “top-notch can advise you when you buy property as a gift so you can minimize your tax bill.

But to get you started here are five things you need to know when you’re trying to avoid the gift tax.

1. Direct Your Funds Differently

When you send funds to someone, it’s usually the recipient who gets taxed. For example, if you were aiming to pay off a relative’s student debt, you might consider giving them a check for that amount. However, when you’re giving a gift of more than $15,000, the giver can be taxed on every dollar over that figure, in some cases up to 40%.

Using the student debt example, writing a check to the relative is considered a gift while paying the college directly is not. In the case of real estate, payments to someone else’s mortgage is going to fall under the gift tax when exceeding $15,000. However, you can apply your unified tax credit to offset the tax on paying someone else’s mortgage.

The way that you allocate your money and claim tax credits can ensure that you hold onto more of it. Before handing over a piece of property, consult with an experienced local agent to ensure that you don’t end up paying more taxes than you need to.

Before starting this process, have your home’s value assessed. If the value has dropped in recent years, you won’t be stuck paying taxes based on an inaccurately inflated value.

2. Use Marriage To Your Advantage

While the current nontaxable gift limit is $15,000, spouses giving from their joint property take advantage of a doubled limit. In this case, the IRS considers the gift to come from both parties at an equal rate.

One person and their spouse can give $30,000 total as a gift without paying any taxes.

3. Plan Out Your Gift

When giving a gift of real estate, you don’t have to sign over the whole property in one day. If it’s not an urgent gift, ownership can be assigned in portions. Plotting out the assignment of ownership over several years can help you from breaching the limits on gift taxes.

For homeowners with a property valued at $200,000, consider the limits above. If a couple gives a 15% of the ownership to their child every year, the gift won’t hit the limits causing it to be taxed.

With just a modicum of planning, the home can be gifted without paying gift taxes.

4. Divide it Between Family Members

Another way to give a gift of real estate without incurring the tax burden is to divide it between multiple family members.

This is a good idea when a family wants to give their lakehouse or vacation home to their children. Dividing it between two children and their spouses allows the homeowner to gift $60,000 worth of property to each couple without tax penalties.

If you and your spouse are looking to give a piece of property to just one child, consider gifting it to the child, their spouse, and their children. Each family member can receive $30,000 from a couple without the couple being taxed.

5. Use Annual Promissory Notes

Securing a deed with annual promissory notes is a good way to give a piece of property as a gift. Once the deed is secured with promissory notes, it can be sold to the recipient with a grant deed.

The homeowner signs it over to the recipient and will assign a purchase price. While this purchase price is likely going to be higher than the annual limits, using promissory notes can divide it up.

If you have a property worth $90,000, assign six promissory notes to the deed totaling $15,000. Have the gift recipient sign them each. Every year, one promissory note can be forgiven and then in six years, the property will have been “paid off” by the recipient.

While this process takes longer than other methods of avoiding the gift tax on real estate, it allows the property transfer to be under the limits of the gift tax.

Working With an Agent Can Help

If you need to transfer a valuable piece of property, you could be paying 18% to 40% in gift taxes for every dollar over $15,000. With the help of an experienced local agent who knows all about local tax law and real estate transfers, you can ensure that you stay above board while not paying high taxes.

Contact us today for tips on how to transfer a valuable piece of property without paying through the nose on taxes and fees.

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Andrew Schmeerbauch

Andrew Schmeerbauch is the Director of Marketing at Clever Real Estate, the free online service that connects you top agents to save on commission. His focus is educating home buyers and sellers on navigating the complex world of real estate with confidence and ease. Andrew has worked on projects for the United Nations and USC and has a particular passion for investing and finance. Andrew's writing has been featured in Mashvisor, L&T, Ideal REI, and Rentometer.

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