How To Gift the Real Estate from Your Rental Business
You’ve worked hard to accumulate and build your investment portfolio, and you would hate to have to turn around and pay a huge tax bill to get rid of it. If selling your property is not in your best financial interest, you can gift it to a recipient of your choice. The Tax Code dedicates about twenty pages to Instructions for Form 709, United States Gift (and Generation-Skipping) Tax Return, but a gift is very simply defined by the IRS, as:
“Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”
As always, speak with your legal and tax experts to help with your decision to see if it makes sense to include your rental real estate as part of your overall estate planning strategy. You can also get answer to many of questions, here. Basic options to consider are gifting today, or bequeathing to heirs upon your death. Let’s take a look at some of the significant factors.
Why Gift Your Property?
Your personal financial situation is unique. Still, the leading reason for gifting real estate is to take advantage of any tax benefits. However, if done correctly, it is possible for you AND your recipients to avoid incurring a tax bill.
Strategies for Gifting Property
As of 2019, the IRS has set a lifetime limit on the gift tax exemptions at $11.4 million for individuals and $22.8 for married couples. Depending on your financial goals and long-term plans, you and/or your married partner can begin gifting annually to transfer the ownership of assets to a donee slowly over time. For 2019, the annual exclusion is set at $15,000 per person ($30,000 per couple) per donee. For example, if a couple has two children, each parent can gift up to $15,000 per child, which totals $60,000 in annual exclusions
Another simple way to help save on your tax bill is to transfer an income-producing property(s) to a child or donee whose income level subjects their earnings to a lower tax rate. Though you, as the donor, will not receive a direct tax exemption, it can save you money by lowering your overall tax burden.
Tax Implications of Gifting Property
First and foremost, as the donor, there are no tax deductions for you or the recipient. So unlike writing a check for a recurring expense or large expenditure as part of running your business, it won’t reduce your taxable income.
Tax Basis Transfers to the Recipient
The IRS uses the tax basis of an asset to calculate any gain or loss at the time of sale. For example, if you purchased your property for $300,000 15yrs ago, but the current market value is $400,000, the tax basis is $300,000. If, after gifting the property, the donee decides to sell it at market value immediately, they would be taxed on $100,000 profit.
Applicable Inheritance/Estate Taxes
Putting your assets in a trust or gifting them during your lifetime can help to eliminate the “death taxes” your heirs will incur. Luckily, as of 2019 the state of Michigan does not collect inheritance or estate taxes. If you’re unlucky to live in one of the handful of states which still collect an inheritance tax, unless your financials are in order, your death is going to be expensive for your heirs. At the Federal level, the exemption for the estate tax is currently set at $11.4 million, which eliminates many Americans. If, however, you’ve accumulated a sizable nest egg, gifting your real estate holdings, either now or through a trust, will help to alleviate your overall tax burden when the time comes.
You’ve spent a lifetime growing your real estate business, but as you get older, it’s hard not to think, “Okay, what’s next?” Gifting your real estate holdings serves two significant purposes, 1) it provides a way to transfer ownership of your assets, and 2) it is a very effective way to do so while avoiding paying hefty tax bills. When it’s time to start thinking about your next step, discuss your financial future with your tax professionals to ensure your heirs receive the full benefit of your generosity.
Photo by Bruce Mars