Gifts of real estate are a common way folks leave their wealth to family before they pass on. Unfortunately, such transactions often involve a failure to report the gift to the Internal Revenue Service.
Failure to report gifts of real estate to the Internal Revenue Service is thought by the agency to be quite common. Sources said that the IRS estimates that somewhere between 60 and 90 percent of the transactions which appear to be gifts of property to family members are unreported to the IRS. The IRS even suspects that up to 100 percent of real estate transactions may be unreported to the IRS.
According to the Wall Street Journal, the IRS is currently in an effort to increase reporting of gifts of real estate. It is doing so by obtaining land-transfer records in at least 15 states to search for evidence of omissions. More records will reportedly be sought out as well, including those from California, a state known for its high priced properties.
Generally speaking, lifetime gifting is a great way to reduce estate tax liability. The new tax rules for 2010 and 2011allow individuals to give as much as $5 million of gifts over their lifetime free of gift tax. Gifts given to any number of individuals which exceed $13,000 in any given year, though, are subject to federal gift tax, and require a filing. This is one area many folks may trip up on reporting requirements.
Even where a specific gift doesn’t trigger gift tax in the year it is made, though, it could reduce the donor’s $5 million lifetime gift tax credit to the extent that more gift or estate tax could later be owed. It is important to keep good records of the gifts one has made, and to pay attention to gift tax ramifications.
Experts in the field say that as the IRS gets more records from various states, there are expected to be additional examinations into the issue.
In our next post, we’ll continue with this topic.
Source: Wall Street Journal, “IRS Scrutinizes Gifts of Real Estate,” Arden Dale, 27 May 2011.