Transferring a home to a family member — whether to a child, a grandchild, or another relative — is a common estate planning and family financial decision. What many people do not anticipate is the potential federal gift tax implications of making that transfer. When a property is deeded to someone for less than its full fair market value, the difference between the value of the home and what the recipient paid can be treated as a taxable gift, with consequences for the donor’s lifetime gift and estate tax exemption.
Mandelbaum Barrett PC attorney Steven Holt answered an NJ.com Biz Brain reader’s question on gift taxes when a home is deeded to a family member. Holt practices in the firm’s tax law and trusts and estates practices, advising individuals and families on gift tax, estate tax, and related planning matters in New Jersey. His response to the Biz Brain question reflects the firm’s commitment to helping families navigate the often-overlooked tax consequences of real property transfers.
How Gift Tax Applies to Real Property Transfers
For federal gift tax purposes, a gift is any transfer of property for less than full and adequate consideration. When a homeowner deeds property to a family member without receiving fair market value in return, the excess of the home’s value over any consideration received is a taxable gift. If that gift exceeds the annual gift tax exclusion — the amount that can be given to any single recipient in a calendar year without filing a gift tax return — the donor must file IRS Form 709, the federal gift tax return, to report the transfer.
Filing a gift tax return does not necessarily mean gift tax is owed. The federal unified credit covers both gift tax and estate tax, sheltering a substantial amount of lifetime gifts from current tax. Gifts that exceed the annual exclusion reduce the donor’s remaining lifetime exemption. If the total of lifetime taxable gifts and the taxable estate exceeds the applicable exclusion at death, estate tax may be owed on the excess. For donors making large property transfers, understanding how those transfers affect their remaining exemption is an important part of comprehensive estate planning.
Other Considerations in Real Property Transfers
Beyond the gift tax, transferring a home to a family member carries other tax and planning consequences. The recipient’s income tax basis in the property — which determines the gain subject to capital gains tax if the property is later sold — will generally be the donor’s original basis (carry-over basis) in a gift transfer, rather than the stepped-up basis the recipient would receive if they inherited the property at death. Depending on the property’s appreciation in value, this difference can have significant capital gains tax implications for the recipient down the road.
According to the Internal Revenue Service, gift tax rules apply to a broad range of property transfers, and the rules governing annual exclusions, filing requirements, and the interaction between gift and estate taxes are worth understanding before making any significant transfer. Consulting with a tax attorney before deeding property helps avoid unintended consequences.
Contact Mandelbaum Barrett PC for Tax Law Guidance
If you have questions about gift taxes, property transfers, estate planning, or other tax law matters in New Jersey, the tax law team at Mandelbaum Barrett PC can help.
Reach out through our contact page to speak with our team. We are here to help families navigate the tax implications of real property transfers and estate planning decisions.