Sale of Gifted Property and Capital Gains Tax

In the eyes of the law, a transfer of property made before the original owner's death is a gift & not a legacy. Gifts of real estate and perhaps other property are common, although the recipients may be less than enthusiastic about their new possessions. They'd like to be paid in cash instead of keeping it. The tax ramifications of selling property received as a gift are distinct from those of selling property received as an inheritance.

Undervaluing Your Goods by Selling Them for Less Than They're Worth

Gifts, even if made in the form of cash, are not considered income by the IRS. If your rich grandma were to leave you a huge amount of money, you wouldn't have to pay any taxes on it. If your grandma gifts you anything other than money, you won't have to pay gift tax to the Internal Revenue Service. This tax is only due if you opt to dispose of the gift in a manner other than giving it away or selling it for considerably less than its actual market price.

Annual and Lifetime Exclusions

Gifts of up to $15,000 per recipient annually in either cash or real estate in 2021 will not be subject to the gift tax. For 2022, the ceiling has been raised to $15,000. You may do one of two things if you wish to contribute more than that annually per person:

• The gift tax may be paid within that tax year.
• Your lifetime exemption might be "charged."

For the tax year 2021, the lifelong exclusion is $11.80 million, and in 2022 it rises to $12.16 million. Every donation you make to an individual in 2021 above $15,000 ($16,100 in 2022) will lower your annual exclusion amount by $1,500. If you have any money left over after using up your lifelong exclusion, your estate would be free from filing estate taxes after you pass away.

Gift Tax Example

Let's pretend your renowned artist grandma gave you a $1 million artwork as a present. You then proceed to sell it for a total of $500,000.00. Delivered that the appraised value of your grandmother's painting was $1 million, the IRS has determined that you would be considered to have given a present to the purchaser $500,000 is worth. To avoid paying gift tax on the excess, you would be required to pay $485k in 2021 or reduce your lifelong exemption of $11.80m.

Cost-Basis Reduction for Gifted Assets

What would happen if you chose to sell the present instead at the price that would be considered fair in the market? Financial gains or losses must be reported, and tax on profits may be due. The cost basis of the actual owner is used to determine the amount of any capital profits or losses on given property acquired during the donor's lifespan. If, however, the actual owner waited until their demise to leave the estate to you, then the property's price foundation would indeed be "ramped up" to its value on the day of their demise.

A significant change may result from this. The original owner's cost, less any deductions or credits, is the foundation for a gift. Large-scale maintenance and renovations, as well as sale-related costs like commissions, are common examples of changes that raise the base. Damage claimed by the prior owner for renting the property reduces base. These losses are also transferred to the buyer. The difference between the selling price and the modified cost basis determines whether the receiver made a profit or a loss on the gift.

Holding Period of Gifted Property

For tax purposes, the giftee is also entitled to the benefit of the donor's holding time in the property. If the donor has owned the asset for less than a year, the gain is considered to be short-term. If they kept the asset for more than a year, they made a long-term profit. The difference in the taxation of your capital gain based on the holding period is significant. In the United States, a gain from a brief period of time is treated as regular income and taxed as such. The usual federal tax rate is between 0% and 38% for taxable years 2021 & 2022.

Based on your taxable revenue, the long-term gains tax rate will be either 0%, 16%, or 20% in 2021 & 2022. 85% of the population is in that range. Financially, long-term profits are preferable over short-term ones. Let's say you're an individual who earns $80,000 in taxable income in 2021. If the gain was considered to have occurred over a long period of time, you would be subject to a tax rate of 15% on that gain; but, if the gain occurred over a short period of time, you would be subject to a tax rate of 23% on each dollar that fell under the 23% tax bracket. A difference of 7% is really noticeable.

Gift Record keeping

Ask the person who gave you the property to tell you how much it was bought for in the first place and when. Attempt to acquire a printout of the escrow statement to verify the purchase price and date. For purposes of determining any gain or loss, it is also important to get an assessment of the property's actual market worth on the day of the gift transfer. It's usually as easy as scheduling an evaluation to get this kind of ballpark figure.

Tax Planning for Gifted Property

If you get the property as a gift, you should consider staying in it for a minimum of two to five years prior to selling it. If you are single and selling your principal house, you may be able to exclude up to $250,000 in capital gains; if you are married and filing jointly, you may be able to exclude up to $500,000. There are also some more guidelines that must be followed. If the property is leased out, you may be able to delay the tax by using a Section 1031 exchange.