How to Avoid the Gift Tax on Real Estate

You can avoid gift taxes on real estate by giving away partial interest in your property over several years until it is completely transferred. Giving away the property in increments will allow you to transfer your real estate tax-free while remaining under the $13,000 per year IRS limit for gifts to individuals.

Instructions

1. Pay off any existing mortgage so that you own the real estate free and clear and are able to give it away as you please. Then hire a certified appraiser to conduct an appraisal. The appraisal will determine the current fair market value of the real estate. You can find appraisers by searching telephone listings.

2. Review the fair market value and start the gifting process by signing the recipients to a deed of trust, a legal document similar to a mortgage. The deed of trust will outline how much of the fair market value is being transferred to the individual recipients. The total should match the fair market value, allowing you to completely transfer ownership.

3. Secure the deed of trust with annual promissory notes signed by the recipients. A promissory note is a legal promise to pay, but in this case you will cancel the promissory notes as they become due, turning the ownership stakes into gifts. Example: The fair market value of your real estate is $130,000, and you decide to give it all to one person. That one recipient can receive no more than $13,000 in gifts from you in a single year, so you would sign her to 10 annual promissory notes at $13,000 apiece, with each representing a 10 percent stake in the real estate. Each year you will cancel the promissory note as it becomes due, turning the ownership interest into a gift that is within the IRS guidelines for avoiding the gift tax. At the end of the 10 years, the recipient will have full ownership of the real estate and you will have avoided gift taxes.

Tips & Warnings

• The IRS warns on its website that laws on property transfers and gift taxes are very complex, and that you should consult with a professional, such as an accountant or attorney before giving away real estate.

References

• ThinkGlink.com: Avoid Capital Gains Or Gift Tax On Real Estate
• RealtyTimes.com: Giving Property As a Gift Requires Creative Tax and Financial Planning
• Internal Revenue Service: Gift Taxes