On December 31, 2013, new law went into effect in Michigan allowing parents to gift their real estate to children during the parents' lifetimes without uncapping the taxable value of the property. As a result, several families took advantage of the new law, and parents actually transferred ownership of their homes to their children. However, preparing, signing and recording a deed transferring the ownership is not all that is required with respect to a transfer of ownership of the property.
Taxable Gifts Are Required to be Reported
The tax rules on gifts are such that an individual can gift up to $14,000 per year without any reporting requirements. For a married couple, that means a mother and father can gift up to $28,000 to each child ($14,000 per parent to each child) during any calendar year without any reporting requirements. However, gifts greater than $14,000 per year, per person are technically "taxable gifts" and are thus required to be reported to the IRS on Form 709 – United States Gift (and Generation-Skipping Transfer) Tax Return.
These "taxable gifts" (the amount of a gift from parents to children above the $14,000 per year amount) are first deducted from an individual's Estate and Gift Tax Credit. Each individual currently has a credit in the amount of $5.3 million, which is normally more than sufficient to absorb the value of all gifts made by a parent (or parents) to their children. A married couple would each have the $5.3 million credit, providing an even greater opportunity to transfer gifts in excess of $14,000 under their credit without having to actually pay a gift tax.
Determining the Value of the Gift
To determine the value of a gift, the parents must obtain a certified real estate appraisal from a licensed appraiser to determine the value of the real estate when gifted. A certified real estate appraisal must be performed by a certified appraiser, which is the only valuation that the IRS will accept. It should be noted that a certified real estate appraiser is different than a real estate broker/agent. Certified real estate appraisers are licensed to value property, and typically perform physical inspections of the property and evaluate comparable sales of similar properties in determining an opinion as to the value of property. Certified appraisers, after conducting their evaluation, research and investigation into the property, draft a written report that details how the valuation is arrived at for the gift evaluation purposes. This written report is then actually attached to Form 709 and filed with the IRS.
Jack and Sue own a home on Lake Michigan with a value of $1.2 million, as confirmed by a certified real estate appraisal. In January 2014, Jack and Sue transferred 100% of the title to the home to their three children. Based on the fact that Jack and Sue could transfer $28,000 to each child as a non-reportable and non-taxable gift, the actual gift to each child was $372,000 ($1.2 million ÷ 3 = $400,000 - $28,000 = $372,000). Jack and Sue would then be required to report the $372,000 gift to each of their children. Jack and Sue could claim any part of each of their credits to cover the $372,000 amount. They may elect to each deduct one-half of the gift to each child from each of their credits, which would result in Sue deducting $558,000 from her $5.3 million credit ($372,000 ÷ 2 = $186,000 x 3 = $558,000), and Jack would similarly deduct one-half of the total gifts to the children in the amount of $558,000.
In this example, Jack and Sue would each then have $4,742,000 left of their total Estate and Gift Tax Credit ($5,300,000 - $558,000 in credit used for the gifts to each of their three children).
As a result, for those of you who did make transfers of ownership of real estate, or any gift with a value in excess of $14,000 to an individual in 2014, technically, IRS Form 709 – United States Gift (and Generation-Skipping Transfer) Tax Return is required to be filed to report that gift and apply your Estate and Gift Tax Credit to the gift to avoid paying tax on the value. If you made such a gift and were not aware of this requirement, you should immediately consult your legal and tax professionals to discuss the matter.