Transferring property to a family member involves careful planning to minimize or avoid tax liabilities, including federal gift taxes, capital gains taxes, and potential state taxes. By understanding and utilizing current tax laws and exemptions, you can structure property transfers effectively. Below are strategies and considerations to assist you in this process.
1. Utilize the Annual Gift Tax Exclusion
Explanation:
The annual gift tax exclusion allows you to give up to $18,000 per recipient in 2024 without incurring gift tax or affecting your lifetime gift and estate tax exemption. If you’re married, you and your spouse can each give $18,000, totaling $36,000 per recipient per year through gift splitting. NerdWallet Home Page
Application to Property Transfer:
- If the property’s value is within the annual exclusion limit, you can transfer it without incurring gift tax.
- For properties exceeding the annual exclusion, consider transferring fractional interests over multiple years.
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2. Use the Lifetime Gift and Estate Tax Exemption
Explanation:
The lifetime gift and estate tax exemption for 2024 is $13.61 million per individual. Gifts exceeding the annual exclusion reduce your lifetime exemption but don’t incur immediate tax unless you exceed the lifetime limit.IRS
Application to Property Transfer:
- You can transfer property worth up to $13.61 million over your lifetime without incurring federal gift tax.
- You must file Form 709 to report the gift and the amount applied against your lifetime exemption.
Considerations:
- Reducing your lifetime exemption may impact the amount you can pass tax-free at death.
- The exemption amount is scheduled to decrease after 2025 unless Congress extends it. Kiplinger
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3. Transfer Property Through Inheritance
Explanation:
Instead of gifting property during your lifetime, you can transfer it upon your death through your will or a trust. Beneficiaries receive a step-up in basis, adjusting the property’s tax basis to its fair market value at the date of death, potentially reducing capital gains tax if they sell the property. IRS
Considerations:
- This method avoids gift tax but doesn’t provide the recipient with immediate ownership.
- Estate taxes may apply if your estate exceeds the lifetime exemption amount.
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4. Establish a Qualified Personal Residence Trust (QPRT)
Explanation:
A QPRT allows you to transfer your residence to a trust while retaining the right to live in it for a specified term. The value of the gift is reduced by the retained interest, potentially lowering or eliminating gift tax.
Application:
- After the trust term ends, the property passes to the beneficiaries (e.g., family members) without additional gift tax.
Considerations:
- If you pass away before the trust term ends, the property’s value is included in your estate.
- Complex legal requirements necessitate professional assistance.
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5. Use an Intrafamily Loan
Explanation:
Instead of gifting the property, you can sell it to a family member using an intrafamily loan at the Applicable Federal Rate (AFR), which is often lower than commercial rates.
Application:
- The family member pays you over time, avoiding gift tax.
- Interest must be charged at least at the AFR to avoid imputed interest rules.
Considerations:
- Proper documentation and adherence to IRS guidelines are crucial.
- May have income tax implications due to interest income.
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6. Sell the Property Below Fair Market Value
Explanation:
You can sell the property to a family member for less than its fair market value. The difference between the sale price and the fair market value is considered a gift.
Application:
- Combine this strategy with the annual exclusion and lifetime exemption to minimize or avoid gift tax.
Considerations:
- Must report the gift portion on Form 709.
- Potential capital gains tax on the sale.
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7. Create a Family Limited Partnership (FLP) or LLC
Explanation:
Transfer the property into an FLP or LLC. Gift ownership interests in the entity to family members over time.
Application:
- Valuation discounts may apply for lack of marketability and minority interests, reducing the taxable value of the gifts.
Considerations:
- Complex setup and ongoing administrative requirements.
- IRS scrutiny of valuation discounts necessitates professional appraisals.
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