Back in July 2013, the IRS made a stunning statement about a group they were looking at next to target for audits.
Right now, the government shutdown means the IRS has suspended audits. But once it’s going again, you know they are going to be coming hot and heavy against anyone who might have money. The group that they planned to target this fall were people who had property title changes in high cost real estate areas.
In other words, if you had a title change in California – look out! You could add some other targets such as areas from the northeast US, Seattle, and other bigger ticket real estate areas. But why are they targeting title changes? After all, if you sell your house, there is a Form 1099-S given and the IRS gets notice to watch for a sale.
The issue isn’t selling your property, it’s gifting your property. This has long been a practice for the elderly as they think about getting their affairs in order. They could also want to move assets so they can qualify for medical aid from the state. The problem with gifting a property is that it is a taxable event.
If your mom gifts her house to you, you may end up paying a lot of tax. If your Grandmom splits the house between your husband and his cousins, they all could pay a bunch of tax.
Gifting = Tax, unless you correctly report it.
You can only gift $14,000 per year without tax. If the gift is higher than that, then it will be subject to tax.
There are strategies to avoid the tax, but you must be proactive! For example, there is currently a lifetime exclusion of $5.25 million per person. If Granny gifts a house worth $200,000 free and clear to you and you don’t do anything, you could be facing a gift tax of up to 40% on the amount over $14,000. Or, you could file the gift and use up part of the lifetime exclusion and pay NOTHING in taxes.
Don’t just gift or accept a gift without understanding the tax consequences. Usually you can do what you want, but you have to file the right paperwork to do it.