Don’t make that gift of real estate without asking first!

Gifts of your real estate can be a bad idea for taxes. What?????? Many of you have probably heard that you should give real estate to your kids to help minimize taxes, but that is really only applicable for estate taxes and only if you have a very large estate (at least $15,000,000 or twice that for couples).   For most people estate tax is not even close to a concern.   

 

So if you have no estate tax concerns, a gift of your real estate is not saving your family estate taxes; you are wasting your time and money. 

 

Of course your kids may not feel that way…I have often had adult children hauling their parents in to my office to ask about how the parents can make gifts to the children. However they may be interested to learn that the gifts can be bad for their income taxes if they ever plan to sell the property.   If you make a gift of your real estate during life instead of passing the property at death, your kids will use the same cost basis you have in the property to determine their capital gains income tax if they ever sell the property.  Basically your kids step into your shoes with regard to the built in capital gain in the property.  On the other hand if that property is passed at death, the cost basis is increased to the fair market value of the property and the capital gain is wiped out.   So your kids could sell the property after your death with no income tax consequences.  This rule is true for all kinds of property (stock, art, etc), but real estate is the most common application.

 

As with any area of tax law there are some exceptions and special facts which may dictate a different plan of action.  For example, if the real estate is a principal residence occupied by the child, or if the family is exploring planning to help with Medicaid qualification, then these factors may justify a gift even in the face of the potential income tax detriments. 

 

If you are considering a gift of real estate, make sure you consult your tax advisor first to determine whether you are gaining or loosing any tax benefits.