{"id":8175,"date":"2022-06-07T15:00:05","date_gmt":"2022-06-07T19:00:05","guid":{"rendered":"https:\/\/www.realtyhop.com\/blog\/?p=8175"},"modified":"2024-11-11T12:30:04","modified_gmt":"2024-11-11T17:30:04","slug":"real-estate-gift-tax","status":"publish","type":"post","link":"https:\/\/www.realtyhop.com\/blog\/real-estate-gift-tax\/","title":{"rendered":"Real Estate Gift Tax – What It Is and How to Avoid It"},"content":{"rendered":"

There may be a time when you want to give someone a gift in life. However, you must first understand the real estate gift tax before you do so. While there are some exceptions, any gift is a taxable gift by the IRS’s definition. In other words, anything could be a taxable gift, including cash, jewelry pieces, cars, and real estate properties.<\/span><\/p>\n

If you are thinking about gifting a piece of real estate to your children, you are likely if there’s a way to avoid paying the gift tax. How do you avoid the gift tax? In this guide, we will explain what the gift tax entails and things you can do to avoid or reduce the real estate gift tax.<\/span><\/p>\n

What is Real Estate Gift Tax?<\/span><\/h2>\n

According to the Internal Revenue Service (IRS)<\/a>, the gift tax is a tax on the transfer of property from one individual to another while receiving nothing or less than full value in return. Even though it’s called a “gift tax,” the tax applies whether or not the person giving the property intends the transfer to be a gift.<\/span><\/p>\n

Federal vs. State<\/h3>\n

Gift tax is a federal tax, and there are no state gift taxes to worry about as of 2024. For some people, this can be a house gift tax. But as mentioned earlier, just about any gift you give to someone can be taxed. The donor of the gift is typically the one held responsible for reporting and paying the gift tax. On or before the Tax Day (April 15) of the calendar year following the year in which a gift is made, the donor must file a gift tax return using <\/span>Form 709<\/span><\/a>.\u00a0<\/span><\/p>\n

Annual Gift Tax Exclusion<\/h3>\n

Even though you’re likely to be subject to the gift tax when you transfer property, there is an annual gift tax exclusion of $18,000<\/a> per person for 2024. So if you give less than $18,000 in a year, you don’t need to worry about this. But any more than that, you will be responsible for filing a federal gift tax return.<\/span><\/p>\n

While just about every gift is considered a taxable gift, there are some exclusions. Gifts under the $18,000 limit will not be taxed. Meanwhile, any gifts you give to a spouse or a political organization are exempt from the gift tax. Also, if you pay tuition or medical expenses for someone, no gift tax would be applied to them either. However, if you simply give them the money for their education or medical expenses, that won’t be an exclusion. So you need to be careful in terms of what you gift and how much.<\/span><\/p>\n

How Does the Gift Tax Work?<\/span><\/h2>\n

Since the annual exclusion is $18,000 in 2024, if you give eligible gifts over $18,000 this year, you will have to file a federal gift tax return.<\/span><\/p>\n

However, it is essential to know that the annual exclusion can be doubled if you are married since you can combine your individual allowances. This means an annual exclusion of $36,000 in 2024.\u00a0<\/span><\/p>\n

Annual Exclusion Limit<\/b><\/h3>\n
\n\n\n\n\n\n\n
Year<\/span><\/td>\nSingle<\/span><\/td>\nMarried<\/span><\/td>\n<\/tr>\n
2024<\/span><\/td>\n$18,000<\/span><\/td>\n$36,000<\/span><\/td>\n<\/tr>\n
2023<\/span><\/td>\n$17,000<\/span><\/td>\n$34,000<\/span><\/td>\n<\/tr>\n
2022<\/span><\/td>\n$18,000<\/span><\/td>\n$32,000<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

But even if you happen to go over the annual exclusion, there is no need to worry just yet. You may be able to use the lifetime exemption.<\/span><\/p>\n

Lifetime Gift Tax Exemption Limit<\/h3>\n
\n\n\n\n\n\n\n
Year<\/span><\/td>\nSingle<\/span><\/td>\nMarried<\/span><\/td>\n<\/tr>\n
2024<\/span><\/td>\n$13,610,000<\/span><\/td>\n$27,220,000<\/span><\/td>\n<\/tr>\n
2021<\/span><\/td>\n$12,920,000<\/span><\/td>\n$25,840,000<\/span><\/td>\n<\/tr>\n
2022<\/span><\/td>\n$12,060,000<\/span><\/td>\n$24,120,000<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

 <\/p>\n

The lifetime exemption is an additional amount that can be given throughout your life. The IRS allows a lifetime tax exemption on gifts and estates up to a certain limit. As of 2024, the limit is $13.61 million, up from $11.7 million in 2021. Like the annual exemption, this lifetime exemption is also doubled if you are married. In other words, you and your spouse combined can enough a lifetime exemption of $27.22 million in 2024.<\/span><\/p>\n

Annual Gift Tax Exclusion vs. Lifetime Exemption<\/h3>\n

However, the lifetime exemption works differently from the annual gift tax exclusion. With the annual exclusion, if you give $18,000 one year, the following year, you will automatically get the same amount (or whatever the government decides the amount for that year will be) back to give again.<\/span><\/p>\n

2024 Gift Exemptions in Action<\/h3>\n

But with the lifetime exemption, once you use up some of it, it never comes back. Any amount you give over the $18,000 annual limit will go toward your lifetime exemption. Think of it like a giant barrel that catches all of the gifts you make above the $18,000 yearly limit and stops you from paying taxes on them. Of course, the “barrel” will eventually fill up. When you run out of lifetime exemption, you will be responsible for paying taxes on anything exceeding the annual exclusion limit.<\/span><\/p>\n

Every time you use up a portion of your $13.61 million, it whittles down your ability to give in the future, so be careful. The gifting a house tax implication is certainly something you should think about before making any decision about what to do with your home, especially if you have begun to tap into this lifetime exemption.<\/span><\/p>\n

The gift tax rates range from 18% to 40%. The amount you are taxed depends on how far beyond the annual exclusion limit you go. The more you give above the limit, the higher the taxes.\u00a0<\/span><\/p>\n

Example of Lifetime Exemption<\/h3>\n

For example, let’s say that a loving grandparent wants to gift their grandchild real estate worth $118,000. Suppose, in this case, the grandparent has already used up their lifetime exemption. The first $18,000 will not be taxed based on the annual exemption. The next $10,000 will be taxed at 18%, the following $10,000 at 20%, and then the tax rates climb by 2% with every additional $20,000 exceeding the exclusion amount, with the highest rate the parent pays being 28% for the amount between $80,000 and $100,000. See the table 2024 Federal Gift Tax Rates below for a detailed breakdown.<\/span><\/p>\n

(1) Property value = $118,000<\/span>
\n(2) Lifetime Exemption = $0<\/span>
\n(3) Annual exclusion in 2024 = $18,000<\/span>
\n(4) Amount exceeding the annual exclusion limit and respective tax rates<\/span><\/p>\n\n\n\n\n\n\n
Taxable Amount<\/span><\/td>\n$10,000<\/span><\/td>\n$10,000<\/span><\/td>\n$20,000<\/span><\/td>\n$20,000<\/span><\/td>\n$20,000<\/span><\/td>\n$20,000<\/span><\/td>\n<\/tr>\n
Aggregated Taxable Amount<\/span><\/td>\n$10,000<\/span><\/td>\n$20,000<\/span><\/td>\n$40,000<\/span><\/td>\n$60,000<\/span><\/td>\n$80,000<\/span><\/td>\n$100,000<\/span><\/td>\n<\/tr>\n
Tax Rate<\/span><\/td>\n18%<\/span><\/td>\n20%<\/span><\/td>\n22%<\/span><\/td>\n24%<\/span><\/td>\n26%<\/span><\/td>\n28%<\/span><\/td>\n<\/tr>\n
Gift tax amount<\/span><\/td>\n$1,800 (a)<\/span><\/td>\n$2,000 (b)<\/span><\/td>\n$4,400 (c)<\/span><\/td>\n$4,800 (d)<\/span><\/td>\n5,200 (e)<\/span><\/td>\n$5,600 (f)<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

(5) Total gift tax = (a) + (b) + (c) + (d) + (e) + (f) = $23,800<\/span><\/p>\n<\/div>\n

2024 Federal Gift Tax Rates<\/span><\/h3>\n
\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Gift Amount (after annual exclusion)<\/span><\/td>\nTax Rate<\/span><\/td>\n<\/tr>\n
$0 – $10,000<\/span><\/td>\n18%<\/span><\/td>\n<\/tr>\n
$10,001 – $20,000<\/span><\/td>\n20%<\/span><\/td>\n<\/tr>\n
$20,001 – $40,000<\/span><\/td>\n22%<\/span><\/td>\n<\/tr>\n
$40,001 – $60,000<\/span><\/td>\n24%<\/span><\/td>\n<\/tr>\n
$60,001 – $80,000<\/span><\/td>\n26%<\/span><\/td>\n<\/tr>\n
$80,001 – $100,000<\/span><\/td>\n28%<\/span><\/td>\n<\/tr>\n
$100,001 – $150,000<\/span><\/td>\n30%<\/span><\/td>\n<\/tr>\n
$150,001 – $250,000<\/span><\/td>\n32%<\/span><\/td>\n<\/tr>\n
$250,001 – $500,000<\/span><\/td>\n34%<\/span><\/td>\n<\/tr>\n
$500,001 – $750,000<\/span><\/td>\n36%<\/span><\/td>\n<\/tr>\n
$750,001 – $1,000,000<\/span><\/td>\n38%<\/span><\/td>\n<\/tr>\n
$1,000,001 and more<\/span><\/td>\n40%<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

Learn more: Capital Gains on Selling Gifted Property<\/a><\/em><\/p>\n

Learn more:<\/p>\n