John R. Bullis: Delving into gift tax rules

IRS form 709, U.S. Gift Tax Return, is used to report major gifts done in the year. The return is due the following April 15, but if an Extension of Time is filed, the due date might be Oct. 15.

Usually the Gift Tax Return does not require a tax payment since each person has an exemption of $5,490,000 this year.

If the total gifts in the year given to each person are $14,000 or less, the gifts are not taxable income to the recipient and are not an income tax deduction for the person making the gift. And any payments for the recipient made directly to education or medical providers are also “too small to count.” Those gifts all qualify for the Annual Gift Tax Exclusion and are not taxable gifts.

But larger gifts are to be reported on form 709. That form reports both the total value of the gifts and the tax basis of the person that made the gifts. That tax basis is what usually transfers to the recipient.

For example, if Joe bought real estate some time ago for $40,000 and Joe gifts it to son Billy when the value is $104,000, it would be reported on form 709. The value of the gift ($104,000) would be reported on form 709. The taxable gift would be only $50,000 ($64,000 less the Annual Exclusion of $14,000). If Joe gave Billy other gifts in the same year for birthday, etc. those would also be reported on form 709 and would increase the taxable gift.

Billy would then own the real estate and his tax basis would be $40,000 (Joe’s old tax basis). If Billy sold it for $74,000, he would have a taxable gain of $34,000. If it is more than a year and a day since Joe purchased it, Billy would have long term capital gain, not ordinary income. Joe’s holding period also transfers to Billy.

The form 709 should be filed with a copy given to Billy to establish his tax basis. The form requires the value of real estate be verified by a real estate appraisal by an experienced, competent real estate appraiser. A copy of the appraisal should be attached to the form 709 that is filed with IRS.

Joe’s records of his cost of purchase of the real estate should be saved also. A copy could be given to Billy for his files since that tax basis transfers from Joe to Billy.

Depending on the income Billy has in the year he sells that real estate, he might pay little or no income tax. If Joe sold it instead of doing the gift and Joe might have enough income to pay an income tax on that item of $5,100 or so. Giving it could result in a good result for the family.

Of course the goals and facts are important to consider before any action is taken.

Did you hear? “Kindness consists in loving people more than they deserve,” by Joseph Joubert.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs