Giving Real Estate as a Way to Defer Capital Gains Taxes

Introduction

Many people aim to build and keep their riches for future generations. Gifting of real estate is one viable means to this end. Families can establish a stable financial footing by passing on real estate holdings to subsequent generations. Nonetheless, it is crucial to comprehend the tax implications, especially the capital gains tax. This blog will discuss strategies for reducing or eliminating the impact of capital gains tax on the transfer of property between generations.

Capital Gains Tax: What You Need to Know

The sale of any asset, including real estate, results in capital gains, which are subject to taxation. A capital gains tax may be due on any increase in value of a donated asset because it is treated as a transfer of ownership. The amount of tax due is determined by subtracting the property's current market worth from the donor's original investment in it.

Making Use of the Gift Tax Annual Exclusion

Each year, people are allowed to make tax-free gifts up to the annual gift tax exclusion amount. The exclusion will be $15,000 per beneficiary as of 2023. You can avoid paying any capital gains tax if the value of the property you gift is at or below the exclusion amount. One option for avoiding the annual restriction is to make smaller gifts over a longer period of time.

Taking Advantage of the Tax-Free Transfer of Assets During One's Lifetime

The lifelong gift and estate tax exemption can be used to reduce the impact of capital gains tax on gifts of property, even beyond the annual exclusion. One's personal exemption amount in 2023 is $11.7 million. To avoid paying capital gains tax on a property transfer, you can reduce the property's value below the exemption threshold before making the donation. Since the lifetime exemption applies to both gifts and estates, it's vital to think about how that can affect inheritance taxes.

Donations to Nonprofit Groups

Donating the asset to a tax-exempt charity is another way to avoid paying capital gains tax on a gift of property. Donating property to a qualified charity allows the giver to reduce or eliminate their capital gains tax bill by claiming a tax deduction. Giving to charity is a great way to help others and reduce your tax bill at the same time.

Using a Trust for One's Primary Residence

With a QPRT, you can give away your primary or secondary house to charity while still maintaining the right to use it as your primary or secondary dwelling for a set number of years. Donating to a QPRT can minimise or eliminate capital gains tax because the property's value is reduced for gift tax purposes upon transfer. To make sure the trust is set up correctly and suits your interests, however, legal counsel from an estate planning attorney should be sought out.

Forming a Limited Liability Company for the Family

To reduce the impact of capital gains tax on property transfers between generations, a Family Limited Partnership (FLP) may be the best option. The donor can stay in charge as the general partner of the FLP and give away limited partnership shares to loved ones without giving up control of the property. By phasing out the transfer of ownership in this way, capital gains taxes may be minimised.

Conclusion

Gifting real estate between generations can help build family wealth, but it's important to plan ahead and factor in taxes, particularly capital gains tax. Capital gains tax on property gifts can be reduced or avoided entirely through the use of strategies such as taking advantage of the annual gift tax exclusion, the lifetime gift and estate tax exemption, making gifts to charities, setting up a Qualified Personal Residence Trust, or forming a Family Limited Partnership. To make sure these plans fit your unique situation and long-term objectives, it is essential to consult with knowledgeable tax and estate planning professionals. Doing so can help you leave a lasting legacy and ensure your wealth is protected for the next generation.