Gifting property to one of your children..
 

Anyone have experience or knowledge of the "gifting" process? Or would it even be required in this situation?

A father wishes to give 5 acres of a 25 acre plot to a child. This "gift" is really a personal deal between the two but they would like to keep that off the books.

Can he just sell it to him for $1 as the old stories go or can/should he "gift" it to the child to avoid tax issues? Would that even work? I thought I recalled the government allowed yearly and once in a lifetime gifts to children without tax implications but hell...that's not a problem I've had to deal with :). Any other complications? Are there both State and Federal issues involved I assume?

If it matters the land is probably worth somewhere between $50k and $110k as an unimproved parcel.

Any help is appreciated guys!

I believe right now the limit is $15000 a year that a parent can gift to a child. So mom could give 15K and dad could give 15K to each child. It used to be 20K. I also believe you could sell for $1 as well but I would go with the gift approach as long as the land is less than the 15K valuation.

The free gifting is about $10-12k.

The govt will hit you for taxes if they think you've undervalued something to avoid taxes.

I was wrong. Here is the IRS skinny.

"Currently the IRS offers taxpayers a golden opportunity to give substantial and meaningful gifts up to $13,000 annually (or $26,000 if you give jointly with your spouse) in 2011 to as many people as desired in cash, investments, and/or property without triggering mandatory filing of IRS Gift Tax Form 709 and possible payment of gift taxes. This limit may be adjusted for inflation in future years. If you mix in a bit of creativity, you have gifts that can potentially benefit you as well as the recipients."

Interesting so, could mom give son 15k and daughter in law 15k, then dad could do the same for a total of 60k?

Yes, my MIL did this with her grandchildren. Never questioned by the IRS.

When my wife and I got married my grandmother gave us 5 acres to build on.
The deed shows we paid a dollar for it. Maybe that's just a state by state thing.

My brothers and I just set up a LLC and bought our mothers house in Vermont for $1, So for 33-1/3 c we now own a $450K house in Vermont...We did this because my Mom is getting on in years and we don't want the property exposed to the 5 year medicaid medicare look back in case mi madre racks up some substantial medical costs and burns all her saving etc.. Her house is now protected.... The LLC lets her live in the house rent free for the rest of her days..


I know its an apples to oranges comparison to what the OP asks, but sell or trust the land to him...

Though if 5 acres is worth less than the amount allowed to be gifted.... give it

Its certainly doable. However, one of the problems of giving him money and them you letting him "buy" it from you with that momey would result in a potentially taxable transaction for you.

A couple of quetions....

Is it imperative that he take title to the entire 5 acres at once or immediately? If not you could make gifts of a percentage of the 5 acre tract in successive years so that at any given year you were not exceeding the gift tax exclusion. E.g., if the property of 5 acres i worth $48K, you could give him a 25% interest in the property for 4 succesive years until he owned the entire five acres in year 4...amd the gift for each year would be $12k...UNDER THE EXCLUSION.

Or you could just give it to him outight, declare the value of the 5 acres on a gift tax return, exclude $13 K fom the value and show a gift of $37K. Unless your estate is above $3M there likely would be no net tax.

Another question...how is the property curently title? Solely in your name? You and spouse? In a business?

Bottome line it can be done and probably won't result in a tax liability.

Thanks Dueller, I was hoping you would chime in. I'll try to answer all the questions.

It is important that he take title immediately as the property will be used to back a loan to build a residence on.

I'm not sure I understand the second question. You mention giving and gifting as different things. The value of the estate is definitely less than 3mill.

The 25 acres is currently titled only to the father/mother. They have their home on a portion and there is a small mortgage remaining so a release of the five would be needed.

Thx!

It would be easiest to just will the property at death. If they get it for $1, then if they ever sell...the capital gains basis is $1 and anything above that will be profit. If they get it as inheritance, the basis is the value at that point so thay can sell without any tax implication.

This would spoil the idea of using the property as collateral for the unbuilt residence.

Joint tenants, rights of survivorship titling is popular in these situations. If you're trying to transfer ownership and gain recognition of the value for loan purposes then it will be difficult to circumvent... I would have a pow wow with my attorney and accountant at the same time.

In some areas, a sale into an LLC would uncap existing property tax increase limits.
Depending when it was originally bought (eg: in the 1950's), this could result in a huge rate hike...

Local non-homestead commercial rates may be significantly more than personal as well.
Something to consider over a time frame.

An LLC does limit personal exposure, repairs should be deductible as an expense, and the entity doesn't care who it's members are. I'm under belief that transactions within the company between members are invisible to the outside world(state, etc). State filing schedules and procedures are a must. Setting up the company right is also something that prevents expensive litigation later when disagreements happen.

More: Estate Tax Limits | eHow.com

Oh, no doubt. Just trying to get a generic understanding first.

Is your son married? If so...easy peasy. Have wife give him her interest, you give him your interest, each of you give his wife an interest. Each gift valued at $12.5K, under the $13K limit. No reporting requirements; your mortgage company releaes their lien...they own it free and clear.

CAVEAT: You and your wife have to sign 4 separate deeds.

Lot of issues to consider here- the rules have been changing constantly, and in fact changed as recently as the "Fiscal Cliff" . You should hire a tax and legal advisor for an hour and get this right - the avoidance of the IRS issues is very easy, it is the side issues that you want to consider, like the property tax implications, the child's family situation I.e. married? Since you value the property at only $50-$110 the ability to use gifts from the parents to the child over two years may cover it, but you better have a qualified appraisel to avoid any questions. If the child is married, what about a future divorce? How do you expect it to be treated Ina property settlement.

What is the purpose of " keep off the books" - you want the bank to consider the title transfer as legal for collateral purposes but want the tax authorities to be in the dark? sometimes we can't have our cake and eat it too.

Lastly - to the post concerning the transfer to keep a parents asset outside the Medicare net- you just said that you want each of "us" (citizens of the US of A) to share in your mothers future medical bills, while you and your brother keep the asset that should be used to fund those costs.

It is no wonder that our government is in trouble.

Interesting, what do you mean by "no reporting requirements?" I assume you mean 1040 reporting and that there must be some other form for reporting the gifts to uncle Sam? Thx again!

Nope...if the gift is under $13K absolutely NO reporting requirement to IRS

What I outlined is totally legit and done all the time.

Just checked....GIFT TAX EXCLUSION RAISED TO $14K in 2013