The gift of investment real estate is life-changing. It might be your son or daughter’s opportunity to retire early or build a great college fund for their own children. As of 2019, the IRS Gift and Estate Tax Exemption Amount states that any one person can gift another person up to $15,000 tax-free. Also, you can give this amount to an unlimited number of different people. If you and your spouse are gifting the investment real estate to one person, it can be valued up to $30,000. If your recipient is married, you and your spouse can gift the receiving couple up to $60,000 tax-free.
There are a handful of ways to give investment real estate as a gift. Make sure to do your homework before determining the gifting plan for your property to make sure your generosity won’t be a burden on the recipient. Give us a call today at (267) 360-7030 to discuss which of the following ways to give investment real estate as a gift in Philadelphia, Pennsylvania you would like to pursue.
Give Investment Real Estate While Living
If you give investment real estate to a trusted family member or friend, a very popular and low-cost choice is via quitclaim deed. The recipient doesn’t have to report the gift on their tax return, but you do have to include a small monetary transfer amount (usually $10) to validate the deed.
If you want to give your house to your children, but you still need to live there, another option may be a QPRT. Parents arrange to live in the house for a certain amount of time, but the ownership is transferred immediately to their children. At the time of death, the property is not considered a part of their estate anymore which is a huge tax benefit to their children by lowering the overall value of the estate.
Give Investment Real Estate After Death
Popular options of giving investment real estate after death are family trusts that name children as the beneficiaries. Other trust types exist to benefit friends or other business partners. The estate owned by the trust must not be worth more than $11.4 mil per individual recipient to avoid exorbitant taxes to its beneficiaries.
Another option would be to hold properties in an LLC (Limited Liability Corporation) set up in Pennsylvania. The cost basis of the property is reassessed at the time of the death to the current market value creating tremendous savings in capital gains taxes for the recipient.
Options To Avoid
Drafting a will is something you always hear about, but even if you compose it perfectly, it will not avoid your heirs having to go through probate. If you pass with only a will describing your intentions, it does lend a hand to the Judge, but the decision may ultimately fall into the hands of the heirs to decide how to divide the gift of investment real estate, which may or may not be how you intended.
Using a gift deed sounds pleasant, but the recipient must report the gift on their tax return. This usually ends up costing the recipient extra money they weren’t counting on.
Transferring the gift investment property in Philadelphia as joint tenants with rights of survivorship might not be all that and a bag of chips. It will save them time and money avoiding the probate process; however, there are adverse tax consequences. Your cost basis transfers to the recipient which would cause capital gains tax owed on the property, especially if you have already depreciated the value on your own taxes.