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IRS Seeking Real Estate Gifts

If you haven’t told the Internal Revenue Service about a real estate gift, you probably want to start talking.

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The agency has a low-profile but sweeping effort under way to find out about these transactions. It’s using land-transfer records from at least 15 states for evidence of omissions and is seeking the records of more states, including the high-priced property mecca of California.

Until recently, between 60% and 90% of transactions that appear to be gifts of property to family members weren’t reported to the IRS, according to an agency estimate. In at least one state, Ohio, 100% may have evaded IRS radar, the agency suspects.

A significant amount of unpaid tax may be involved, according to Scott Michel, a partner at Caplin & Drysdale. Even if a particular gift did not trigger a tax when made, the transaction could reduce a lifetime gift-tax credit for the taxpayer, so that more gift or estate tax could be due later.

New tax rules have made big gifts to family members popular this year because  someone can now give up to $5 million in his or her lifetime without having to pay gift tax. Nonetheless, any time a gift to one person exceeds $13,000 a year, the giver is supposed to let the federal tax agency know in a filing.

The IRS effort has the look of a stealth operation. Some details were revealed late last year in a John Doe summons for data the IRS issued to the California State Board of Equalization, a taxing body. The summons was required because the state’s Proposition 58 and Proposition 193 complicate the data it maintains about real-estate transfers.

States that have handed over information on gift-like transactions to the IRS include Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington and Wisconsin.

The IRS declined to comment beyond what was in the John Doe document.

Taxpayers need to be aware that there is no special exception to the rules when making a transfer to a family member, says Beth Shapiro Kaufman, a partner in the private-client group at law firm Caplin & Drysdale in Washington, D.C. If the property is valued at more than $13,000, a gift-tax return must be filed. Even if the transfer falls within a lifetime exemption amount–currently $5 million–there is a reporting requirement.

For anyone who has already made a gift but has not filed a federal gift-tax return, it is better to file late than not at all, says Kaufman. Voluntary disclosure typically works out better than having the gap discovered in an IRS audit. Also, even if the person who gave the property has died, the IRS still can collect tax from his or her estate, the person who got the gift, and in some cases, the executor.

Readers, have you or do you plan to gift real estate?

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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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