It is not uncommon for family members to transfer (technically a gift, often subject to Gift Tax in the eyes of the IRS) real estate between each other for Estate Tax, Medicare planning or asset protection purposes. Tax law states than any gift with a value over $13,000 is taxable to the donor. Typically, though, the donor will elect to use a portion of their lifetime Unified Credit (currently $5,000,000) to avoid paying this Gift Tax on these transfers.
Tax law states, though, that the donor needs to file a Gift Tax Return (Form 709) on all gifts valued above $13,000, even though no Gift Tax may be owed by the donor due to the utilization of the Unified Credit. The Gift Tax rate quickly gets to 35% (gifts over $500,000) of the value of the gift.
Last month, a Federal Court instructed the CA Board of Equalization to turn over to the IRS the names of CA citizens who transferred realty at little or no consideration between 2005 and 2010. The IRS wants this information to go after taxpayers who transferred realty to family members and did not file a Gift Tax return (due April 15th).
Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington and Wisconsin have already turned over similar information to the IRS. Compliance in Ohio was close to 0% and the average in Florida and Virginia was only 10%. It appears the IRS will expand this program to other states.
So, if you transferred real estate to a family member for little or no consideration, you should file Form 709, even though it may be beyond the due date. The IRS is looking for Failure to File and Failure to Pay penalties and, possibly, delinquent Gift Taxes.
Editors Note: It is questionable why the IRS is going through these efforts and costs to amass this information, when the present Unified Credit is $5,000,000. Therefore, if you are contacted by the IRS for non-filing, but your transfer was less than $5,000,000 (in 2011 and thereafter), there should be no tax due, albeit they can collect Failure to File penalties. Also, note that the Unified Credit amount has steadily increased in the last ten years, from a low of $675,000 in 2001, to $2,000,000 in 2006 to the present $5,000,000. So, if you made a transfer in 2001 of greater than $675,000, there would be Gift Tax due.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.
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