Gift Taxes And The Lifetime Exemption
It’s very common in real estate deals for the buyer to get financial help from family members. But what about the gift taxes? Buyers inevitably ask this question, and often have incorrect assumptions about how it works.
Who Pays?: Gifts are not income, and almost all cases it is the donor or the giver of the gift that must deal with the tax implications, not the receiver of the gift. Gifts to one’s spouse, however, are not subject to taxation. But be careful, if there is an agreement to repay, it’s not a gift, it’s a loan, and this has obvious implications for the lender on the deal. Also gifts from an employer to an employee are always considered income, and cannot be treated as a gift even if all the other elements of a gift are present. Be sure the buyer understands that a gift cannot come with an expectation to return.
Annual Exclusion: Each year any individual can give any other individual up to $13,000 (married couples can give $26,000) without it being subject to taxation. And that exclusion can be used for any number of individuals. So a married couple can give their married child a total of $52,000 ($13,000 from each parent to each of the child and the child’s spouse, so the total is 4 X $13,000) in December, and then do it again in January, without any reporting obligation.
Lifetime Exemption: Gifts in excess of the annual exclusion trigger an obligation to file a gift tax return on IRS Form 709, even if no tax is currently due. Under federal law, the estate basic exclusion is $5,120,000 as of 2012. So the first $5,120,000 of a person’s estate is exempt from federal tax, and that exemption applies to non-excluded gifts made during a taxpayer’s lifetime. So even though a federal return is required to be filed, individuals do not pay the gift tax until their cumulative lifetime gift giving (less annual exclusions to individuals) exceeds the exemption amount. But the exemption of $5.2 million, however, is temporary and expiring at the end of 2012. Congress has yet to act on an extension.