Real Estate as a Gift

The tax implications involved with giving a gift of real estate is like anything else in life, it depends on the situation. 

Most of the time a gift is tax deductible? It generally depends on who the recipient is. For example, if you wanted to gift one of your rental properties to your kids, that is not a tax deduction to you.

When you gift a piece of real estate to a family member, it’s generally just a way to transfer an asset from one person to the next. If done correctly, you can transfer the property to future generations without future gift tax issues.

For example, you can have a series of gifts set in place to be able to move a property from your name to your kids’ names without any tax issues. In 2016, the annual tax-free gifting amount is $14,000 from one person to another.

This means that if both parents are alive and wanted to transfer a property to their married son, they can potentially gift $56k worth of property this year without any gift tax issues. This is accomplished by:

Mom gifting $14k to son and $14k to daughter in law-

Dad gifting $14k to son and $14k to daughter in law-

If you had a rental property worth $100k, then you can use this strategy over a two year period to fully transfer this property out of your name and into the name of your kids.

There are no Tax Deductions for Family Gifts. Keep in mind the act of gifting itself may not be a tax deduction.

So if you did gift $56k worth of real estate to your kids, you do not get to write-off $56k worth of real estate. Also, when your son receives this gift, he is not paying taxes on the $56k that he received. In other words, gifting an asset from one family member to the next is not tax deductible for you or the recipient.

Gifting Strategies to Save on Taxes-

If you don’t get to write off gifts to family members, why do it at all?

Well, a few reasons. If you have a large net worth, it may make sense to use annual gifting to start shifting assets out of your estate. With estate taxes at a high rate of 40%, it makes sense for a lot of higher net worth individuals to shift assets to the next generation before death.

Another common way that gifting can help save taxes is by shifting income. For example, if you are in a tax bracket that is 15% higher than your kid’s tax bracket, gifting that cash flowing property to your kids can help you to shift the annual taxable income from your high bracket to your family member’s lower tax brackets.

As you can see, although the act of gifting itself may not create a tax deduction, there can be current and future tax savings associated with a properly executed gifting strategy.

When good gifting goes bad-

Before you start working on a plan to shift assets to the next generation, make sure you’ve considered all the facts. Although gifting can provide you with short term and long term tax advantages, it can also end up costing you thousands in unnecessary taxes if not structured properly.

Just like everything else in taxes, a gifting strategy that works great for you may be a terrible for the next investor.

Let’s take an example of dad who did not have a large estate in his later years. If dad had simply gifted the property over to his daughter, then the daughter will receive dad’s basis in this property.

If we assume that dad purchased this property a long time ago for only $50k and is now worth $200k, gifting means that his daughter now receive dad’s carryover basis of $50k. If the daughter were to sell this property down the road for $200k that means that she has a gain of $150k that she would have to pay capital gains on. This could end up costing her $22k in capital gains taxes.

Alternatively, if this property remained with Dad and he keeps it until he passes away, then when his daughter inherits the property, she gets a “basis step-up” to the fair market value of this property.

In this example, if the fair market value of this property at the time of Dad’s death was $200k, then the daughter’s tax basis is now $200k rather than $50k. Using the inheritance strategy, if the daughter decided to turn around one day after inheriting the property and sells it for $200k, she would pay zero taxes on that transaction.

In Conclusion-

As you can see, the different between dad “gifting” his daughter the property today versus waiting to pass this property to her after his death via inheritance means a potential tax savings of $22k.  So what does this mean? Simply, the best answer will depend on your personal situation. If you are looking for ways to make sure you preserve the most wealth for your beneficiaries, work with an adviser to come up with a game plan and do so with the least amount of risk and taxes.  Anyone had the good fortune of being “gifted” real estate as an investment? Please share your opinion in the comments.

If the situation arises, and you have no interest in managing or dealing with tenants, collecting rent or committing the time to be a landlord,  Real Property Management provides a hands free solution for homeowners and investors. Please contact us for a free consultation.

Real Property Management is the largest property management brand in the country, we are well equipped to maximize your investments potential, alleviate daily burdens, and provide detailed communication along the way. As the nation’s leading property manager for 30+ years, Real Property Management has developed intelligent solutions for thousands of individual property owners, investors, tenants and Realtors.

What can RPM do for you? 

Matt Pelton

Matt’s an Ohio licensed Realtor with 20+ years experience in residential and investment real estate sales, leasing, property management, and offering pre-purchase consultations and BPO’s for investors and lending institutions. Matt works as Sales Manger at Real Property Management. You can contact him at 866.500.6200, via email ([email protected]) on twitter and instagram  @CincySalesGuy 

2 replies
  1. Sam
    Sam says:

    Great article! One THING to note is that generally the way to use the gifting strategy is to gift “shares” of an LLC to another person. Up to the limit, the “shares” of the LLC are what you are actually gifting. Since the property is owned by the LLC, the property is essentially transferred via corporation transfer. This strategy works great for 2 LLC per property. Of course seek the advice of an attorney on the exact “how tos”…. and ensure your rental property will stay in the family for generations!


Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.