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Gifting Property Tax Implications

When gifting property, gift and estate taxes are two different types of taxes applied to wealth transfers. A gift is when someone gives away property without getting anything back in return. An example of a gift is giving your car to your friend. Estate taxes apply to the transfer of assets after death. The recipient of the asset pays these taxes. The gift tax is a tax that the giver of the asset pays. It is usually charged at a rate of 35 percent. The estate tax is generally set at a higher rate, depending on the size of the estate. For example, estates worth $5 million or more are taxed at 40 percent. Estates worth $10 million or more are taxed 50 percent. This article has been drafted by John McGuire, a Denver tax attorney at The McGuire Law Firm, to discuss tax matters related to gifting.

Gift Tax vs. Estate Tax?

Gift taxes apply to gifts given throughout your life. Estate taxes apply to gifts you give after you die. Both types of taxes are essential for many reasons. For example, you’ll owe gift taxes if you give away $10,000 worth of property while alive. If you give away $10 million worth of property after you die, the government will receive that money as income. That means you’ll owe estate taxes on that amount. These taxes are significant because they affect what you can leave behind for loved ones after you pass away.

Gift Tax Policy

The gift and estate taxes were initially designed to discourage people from transferring wealth to heirs at death. However, many people still try to avoid paying the estate tax. For example, people may give gifts to relatives instead of selling property. Or they may transfer property ownership to shell companies not subject to taxation. These actions allow them to pass on their wealth while avoiding the estate tax.

Estate Taxes

The federal estate tax applies to property transfer at death in the United States. The estate tax is imposed on the first $11.58 million of an individual’s estate. The estate tax rate is 40%. The combined estate and gift tax threshold for married couples filing jointly is $22.4 million.

Real Estate Gift Tax

However, the basis is a little trickier regarding a property with loss. When the donor has a basis in property greater than the fair market value and chooses to transfer it as a gift, the donee does not simply take the donor’s basis. This is a situation where there is a built-in loss at the transfer time. In other words, if the donor has a basis higher than the actual value at the time of the gift, more basis concerns must be considered upon the following disposition.

For instance, if the donor has a basis in the property of $50,000 and the fair market value at the time of the gift is $40,000, the donee will wait until the latter disposes of the property to determine his basis for gain or loss purposes. If the donee later sells the property for $30,000, then under §1015, the donee will take a basis equivalent to the fair market value of $40,000. This would allow the donee to recognize a loss of $10,000 rather than $20,000 if he had taken a basis equivalent to the donor’s basis.

Gifting Property Tax Implications

The Capital Gains Tax Over The Long Term

For example, Joe’s parents bought the house when he was born. He will inherit the house if his parents die before him. But, because the house was purchased at a discount, Joe will get less money than his parents paid.

Joe will receive a gift when he sells his house. If he doesn’t give away the house, he will owe taxes on the difference between what he sold the house for and what he gave away. He will also get a larger tax deduction if he gives away the home.

Stay Informed About Gifting

When you give someone else your property, you may not realize there could be unexpected taxes or other financial implications. Before giving away anything, consider what happens when you pass away. You might need to pay inheritance taxes if you leave behind a large amount of money. Or you might need to pay capital gains taxes if you sell the item. If you plan, you can avoid any problems.

You can speak with a Denver tax attorney and Denver business attorney by contacting The McGuire Law Firm.

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