Formalities Important in Claiming Gift Tax Exemption

After several years of post-bubble struggles, the housing market is finally trending upward again. The waves of foreclosures have subsided somewhat, and traditional buyers and sellers are entering the market again.

One potential wrinkle in this improving picture, however, is the possibility of federal gift tax gift consequences for relatives who help buyers make their down payments. This type of transaction needs to be handled with care so that is does not cause problems in an IRS audit.

An important point to note is that individual gifts of $13,000 or less are not subject to the federal gift tax. If a parent is giving money to a child and her partner, the $13,000 threshold for the gift tax exemption could be doubled by giving $13,000 to the child and the same amount to the child’s partner. If both parents do this, the tax exempt amount of the gift could grow to $52,000.

Someone inclined to make a gift to help a close relative make a down payment on a house could also make gifts in successive years – say in December and again in January. That way, the amount of a gift exempt from tax could grow even more.

But the basic threshold is still $13,000. Taxpayers are supposed to report gifts of more than that amount to the IRS. Don’t make the mistake of thinking a financial institution will take care of this for you; taxpayers are the ones responsible for doing so.

In short, when making large gifts, taxpayers would do well to pay close attention to formalities so that they’re all square with the IRS.

Source: “To Givers of Downpayments,” CNC / The New York Times, Lisa Prevost, 1-2-13

Our firm handles situations similar to those discussed in this post. To learn more about our practice, please visit our IRS audits page.