Gift tax Consequences of Real Estate Transfers

by Buchanan Ingersoll & Rooney PC
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[author: Lauren Sweeney]

Often times, one partner in a same-sex couple owns real property and seeks to add the other partner to the title or deed for no consideration (i.e. when no money or other type of payment is received in return).  Though this may appear to be a straightforward process, it is important to keep in mind that there are tax consequences for so doing. This type of one-sided property transfer constitutes a taxable gift for federal gift tax purposes.  Under the federal tax laws, there is a gift tax reporting obligation to the extent that the fair market value of the gifted interest, exceeds the available annual exemption in the year of the gift.

This reporting obligation does not necessarily imply a tax liability.  According to The American Taxpayer Relief Act, each American taxpayer has a $5 million cumulative lifetime gift and estate tax exemption.  This means that any amounts given during life or transferred upon death that total less than $5 million will be transferred free of tax.  Additionally taxpayers are allowed to make annual gifts up to $14,000, per recipient, which gift does not count towards the $5 million lifetime maximum exemption.   Any gift amount to an individual that exceeds $14,000 is considered a taxable gift, and the taxpayer who made the gift is required to file a gift tax return.  Gifts that exceed the annual exemption amount accumulate from year to year and count toward the $5 million lifetime maximum exemption, as do any assets that are part of an inheritance.

The use of a “tenancy in common” may be a beneficial means for gifting the other partner into ownership with minimal gift tax consequences. Because the shares of ownership do not have to be equal in a tenancy in common, the partner may choose to gift a share of the property to the other partner each year (up to the annual exclusion amount) until the desired property apportionment is received.   Best-practices compliance involves not only a gift tax return filling, but also a real estate valuation of the fractional interest being gifted.

Since the repeal of DOMA, legally married spouses can transfer property to their spouses free of the gift tax.  For federal tax purposes, the terms “spouse,” “husband,” and “wife” includes individuals of the same sex who were lawfully married under the laws of a state whose laws authorize the marriage of two individuals of the same sex and who remain married.  However, the terms “spouse,” “husband and wife,” “husband,” and “wife” do not include individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and the term “marriage” does not include such formal relationships.  Gifts to your spouse are eligible for the marital deduction.

Due to the complexity of both real estate and tax law, it is advisable that individuals consult with an attorney prior to adding his or her same-sex partner to a title or deed to ensure proper reporting of both the real estate transfer and gift tax reporting.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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