Wednesday, June 1, 2011

Gifts of Real Estate and the Tax Man

A routine element of my seminars on estate planning is a discussion of tax issues. Most people have heard of, and fear, the estate tax (a tax owed by an estate if the decedent's net worth exceeded the federal exemption, currently $5 million). However, most have not heard of or do not give much thought to the gift tax (owed by the gift maker if a gift exceeds $13,000/per/year). I always say that is a huge mistake. As I say, "the IRS is not forgiving".

From a Wisconsin paper:

The Internal Revenue Service has a low-profile but sweeping effort under way to use state land-transfer records for evidence of omissions in reporting gifts of real estate to family members.

States that have handed over information on gift-like transactions are Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington and Wisconsin, according to the document. Ms. Bonaffini examined a sampling of data from these states and it showed "an extremely high failure-to-report rate," the document said.

One cause of unreported taxes may simply be lack of knowledge. People go and add children's names to property, thinking they are doing a good thing by trying to avoid probate, and have NO idea that they've just made a taxable gift. Sadly, they are about to get a letter from the IRS. It is far less expensive to hire a lawyer for advice BEFORE taking action than hiring one to clean up a mess.

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