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Questions about gift tax
Old 03-09-2008, 04:21 PM   #1
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Questions about gift tax

Back in January, I posted that my sister was selling her half of a farm in Iowa. Need some leagal advice please She has agreed to give me first right of refusal per the contract btw.

Now the question....
One of the lots which is of particular importance is jointly owned by both of us, the deed has both of our names on it. This lot has the grain silos, barns, and cattle pens on it.
She has generously offered to "gift" her half of this lot to me so that the farm can stay operational. She also suggested the possibility of selling it to me for $1 thinking it might save me from paying a gift tax (I assume I will have to pay a gift tax). The portion she intends to gift has a tax value of $24K. I don't use a tax attorney or preparer so thought I would ask here about the best way to proceed on this.
Other info that might help....I reside in Texas and the farm is in Iowa.
Any thoughts as to the advantages or disadvantages of gifting vs selling for $1?
Thank you for any help
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Old 03-09-2008, 04:28 PM   #2
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The recipient does not pay a gift tax. The giver may (depending on estate value on giver's death).
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Old 03-09-2008, 05:13 PM   #3
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I am not a tax expert by any means, but, as I understand it, the recipient of a gift does not pay taxes. Nor, in most cases, does the donor. Rather, gifts in excess of $12k per year are taken away from the donors unified exemption to the estate tax ($345k), so that when your sister passes, her heirs will have $12k less to use as an exemption to the estate tax. Note that the IRS counts the actual value of the transfer. If she sold it to you for $1 and it is actually worth $24k, you would be receiving a $23,999 gift. (the IRS is not so easily fooled)

Here is the IRS web site on gift taxes.

Frequently Asked Questions on Gift Taxes
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Old 03-09-2008, 08:48 PM   #4
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Thank you for the replies. Gumby, I may be overlooking something, but am not able to understand where the $345K comes from. I googled "unified exemption" and it eventually led me here.
Gift become - when does a it taxable?
If I'm reading correctly I would not be taxed on her gift at all and she would not be taxed until she gave away $1 mil.......which is highly unlikely. So unless I'm missing something big, neither of us have anything to worry about.
Agree?
Thanks again
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Old 03-09-2008, 08:54 PM   #5
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Selling for a dollar won't do anything, you'll still owe gift tax.

If you are married, she could give have to your spouse and half to you (i.e. $12k each) and stay under the gift tax limit.

The $2M is semi-unified with the estate tax. So if your sister has a lot of assets at death, that may be a concern.

Short answer: get some advice from an attorney.
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Old 03-09-2008, 09:00 PM   #6
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In some limited situations, the recipient may be required to pay tax on a gift. Tread carefully when dealing with potential tax situations.
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Old 03-09-2008, 09:26 PM   #7
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In some limited situations, the recipient may be required to pay tax on a gift. Tread carefully when dealing with potential tax situations.
Hmmm.....maybe I should look into this a bit more and take work4beer's advice and check with an attorney. Sis won't have a large estate. The farm is the only thing she owns and the money from that won't last long. Paying a gift tax is ok with me if it comes to that. I just need to have control of that particular lot.

PS......cute baby in your blog. I'm hoping to be a grandpa someday.
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Old 03-09-2008, 09:45 PM   #8
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Originally Posted by Poundkey View Post
Thank you for the replies. Gumby, I may be overlooking something, but am not able to understand where the $345K comes from. I googled "unified exemption" and it eventually led me here.
Gift become - when does a it taxable?
If I'm reading correctly I would not be taxed on her gift at all and she would not be taxed until she gave away $1 mil.......which is highly unlikely. So unless I'm missing something big, neither of us have anything to worry about.
Agree?
Thanks again
On the IRS website, click on "Publication 950", which explains the number.
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Old 03-09-2008, 09:47 PM   #9
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Originally Posted by Poundkey View Post
Hmmm.....maybe I should look into this a bit more and take work4beer's advice and check with an attorney. Sis won't have a large estate. The farm is the only thing she owns and the money from that won't last long. Paying a gift tax is ok with me if it comes to that. I just need to have control of that particular lot.

PS......cute baby in your blog. I'm hoping to be a grandpa someday.
As I understand it, a recipient only has to pay tax when the donor improperly fails to do so. But then, I'm not a tax attorney.

I've seen countless situations where a little preventative maintenance saved a lot of time and money later on. Just my two cents.

Thanks for the compliments! I'm still catching up on sleep . . .
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Old 03-09-2008, 10:17 PM   #10
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On the IRS website, click on "Publication 950", which explains the number.
Thanks Gumby...I got it now. Appreciate it.
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Old 03-09-2008, 10:26 PM   #11
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Question on that annual $12,000 gift thing... Does this mean that anytime a parent gives a kid a new car as a graduation present (not something I have personally given or received, but it is not unheard of), that they are filing the forms to track their lifetime exclusion?

Something makes me think that rarely happens. Unenforced and unenforcible laws are a problem. So those people that do fill out the forms are suckers? What a system.

How would the govt ever know if you gave someone a $20,000 gift in any particular year? OK, if you had a large estate, and you did it in the years just prior to death, they might catch it, but otherwise?

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Old 03-09-2008, 11:33 PM   #12
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Question on that annual $12,000 gift thing... Does this mean that anytime a parent gives a kid a new car as a graduation present (not something I have personally given or received, but it is not unheard of), that they are filing the forms to track their lifetime exclusion?

Something makes me think that rarely happens. Unenforced and unenforcible laws are a problem. So those people that do fill out the forms are suckers? What a system.

How would the govt ever know if you gave someone a $20,000 gift in any particular year? OK, if you had a large estate, and you did it in the years just prior to death, they might catch it, but otherwise?

-ERD50
Never underestimate the power of the IRS. Believe me, they have their ways. And don't think people that do things correctly are suckers.

There are plenty of tax court cases to back this up.
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Old 03-09-2008, 11:52 PM   #13
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Her half may be worth $24k on the books, but it would be worth less than that if she were to try to sell it on the open market. Not many people want to buy into half ownership. I was told by my accountant that the IRS takes that into account, so she can claim the value at less than $24K when she gifts it to you. I've forgotten the magic number - 80% of value? A CPA would know.

If she gifts it and it's over $12k, she needs to file a form that applies the amount to her lifetime exemption. The form has to be filed in the year of the gift, it can't be done retroactively.

I'd think she could gift it to you over 2-3 years and take advantage of the 12k limit each time.
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Old 03-10-2008, 10:22 AM   #14
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Great feedback. I think I have a better understanding now. I'll pass this info along to sis.
Again....thanks so much for the help.
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Old 03-10-2008, 10:47 AM   #15
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Never underestimate the power of the IRS. Believe me, they have their ways. And don't think people that do things correctly are suckers.

There are plenty of tax court cases to back this up.
Do you have some examples?

I'm thinking of the case where parents give a 20-something child a graduation gift, or wedding gift, or money for a downpayment on a house. The amount is modestly over the 12k or 24k limit, and it only happens once with each child. 30 years later, the parents die.

What has the IRS actually done in those circumstances?
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Old 03-10-2008, 11:48 AM   #16
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Originally Posted by ERD50 View Post
Question on that annual $12,000 gift thing... Does this mean that anytime a parent gives a kid a new car as a graduation present (not something I have personally given or received, but it is not unheard of), that they are filing the forms to track their lifetime exclusion?

Something makes me think that rarely happens. Unenforced and unenforcible laws are a problem. So those people that do fill out the forms are suckers? What a system.

How would the govt ever know if you gave someone a $20,000 gift in any particular year? OK, if you had a large estate, and you did it in the years just prior to death, they might catch it, but otherwise?

-ERD50
You have a good point ERD50. I'm no tax expert, but I do some reading on the subject simply because I do my own taxes and try to manage my income to be tax efficient and my record keeping to take advantage of deductions.

I've never heard of a case where the IRS called someone on modest violations of gift tax provisions. Whereas cases of unreported income and exaggerated/undocumented deductions seem to show up regularly in articles. I'm not saying there aren't some cases, just that in casual reading, I've not run across any. I've run across lots of reporting on other relatively minor violations.

The IRS has modified rules to reduce violations of commonly abused areas such as charitable contributions, medical deductions, putting assets under the kids SS#, home offices, etc., etc. Yet I haven't noticed modifications of rules regarding gift taxes. Perhaps they don't consider it a big problem when done modestly by the little guys? Or that most Americans don't have enough extra $$$ to be regular, significant violators? Or because the violations would commonly be undocumented and unlikely to hit the radar screen in modest amounts?

It's an interesting situation. Say you, a widower, give DD your 3 year old car when she graduates from college with an estimated value of $12k to help her get started in her post-college life. Then, to celebrate her being #1 in her class, you invite her on a cruise at a cost of $2k. During the balance of the year, you spent $3k additional on her by helping her start her professional wardrobe, furnish the apartment, etc., charging these retail purchases on your credit card as you shop. Suddenly, the IRS swoops in and nails you for not declaring the $5k excess? It just sounds so unlikely.........
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Old 03-10-2008, 02:04 PM   #17
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Do you have some examples?

I'm thinking of the case where parents give a 20-something child a graduation gift, or wedding gift, or money for a downpayment on a house. The amount is modestly over the 12k or 24k limit, and it only happens once with each child. 30 years later, the parents die.

What has the IRS actually done in those circumstances?
There are plenty of examples of the IRS going after unreported gifts. Most don't make it to tax court because they are settled before it gets to that point. The ones that do make it involve larger sums of money, for the most part.

Since most of the smaller cases are not publicly disclosed, there is no link I can provide or copy of IRS letters I can upload.

For the most part, the IRS will not go after modest gifts over the limit, but they will get you on them if they find them during an overall audit. They tend to go after gifts from high net worth people trying to spend down their assets, especially when they use sophisticated discounting methods (like FLPs).
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