Property Gift: Understanding Tax Implications

The federal gift tax applies to transfers of property when the donor receives nothing of equal value in return. For 2024, the annual gift tax exclusion allows donors to give up to a specific amount per recipient without filing a gift tax return or using any of their lifetime exemption. Gifts exceeding this annual exclusion amount may require filing a Form 709 with the Internal Revenue Service. The annual gift tax exclusion is adjusted annually for inflation, so donors should verify the current year's limit before making large gifts.

Beyond the annual exclusion, each individual has a lifetime gift and estate tax exemption that allows them to transfer a larger total amount without incurring federal gift or estate taxes. This exemption is substantial but is scheduled to decrease significantly after 2025 unless Congress extends current law. Donors who make large property gifts should consult with a tax professional to understand how these gifts affect their remaining lifetime exemption and potential estate tax liability.

A valid property gift deed in New York must include the grantor's name, the grantee's name, a legal description of the property, and explicit language indicating the transfer is a gift without consideration. The deed must be signed by the grantor before a notary public and recorded in the county where the property is located. Recording the deed ensures that the gift is properly reflected in public records and protects the recipient's ownership interest against future claims.

Beyond the deed, donors should maintain clear documentation of their intent to make a gift, including any correspondence or written statements explaining the transfer. This documentation becomes important if questions arise about whether the transfer was truly a gift or if the recipient later faces creditor claims or estate disputes. Additionally, donors should consider whether a gift letter or separate written agreement would help clarify the terms and protect both parties' interests.

When a recipient receives a property gift, the tax basis of the property is generally the same as the donor's basis at the time of the gift. This means if the donor purchased the property for $200,000 and gifts it when it is worth $300,000, the recipient's basis remains $200,000. If the recipient later sells the property for $350,000, they will owe capital gains tax on the $150,000 gain, not just the $50,000 increase in value after receiving the gift. Understanding the stepped-up basis rule, which applies to property inherited at death but not to gifts during life, is important for long-term tax planning.

Property recipients must assume responsibility for property taxes, maintenance, insurance, and any outstanding liens or mortgages unless explicitly addressed in the gift agreement. Recipients should conduct a thorough title search and obtain title insurance to protect against unknown claims. Additionally, recipients should be aware that accepting a property gift may trigger reassessment of property taxes in some circumstances, potentially increasing their annual tax obligations.

Donors should consult with an estate planning attorney or tax professional before making substantial property gifts, particularly when the gift exceeds the annual exclusion amount or involves complex property interests. Recipients should also seek legal counsel to understand their obligations and ensure proper title transfer. Property gift planning becomes increasingly important when gifts involve family dynamics, blended families, or situations where the donor has significant assets or multiple potential beneficiaries. Professional guidance helps ensure that property gifts achieve the donor's objectives while minimizing tax liability and legal complications for all parties involved.