Gifting a property to someone can be a generous act, but it also involves some important legal and financial considerations. To ensure the gifting process goes smoothly, there are a few key forms you’ll need to complete.
Gift Tax Return
If the value of the home you’re gifting exceeds the annual federal gift tax exclusion amount (currently $16,000 for 2022), you’ll need to file a Form 709 gift tax return with the IRS. This form reports the value of the gift to the IRS so they can determine if any gift tax is due. You must file the gift tax return by April 15th of the year following the gift.
When is a gift tax return required?
- If the gift exceeds the annual exclusion amount
- If you have already used up your lifetime exemption amount
- If you are splitting a gift with your spouse
You do not owe gift tax until the value of all taxable gifts made exceeds your lifetime exemption amount, which is currently $12.06 million. But you still must file the return.
Deed
To legally transfer ownership of real estate, you need a new deed listing the recipient as the grantee. This signed document transfers the title and ownership rights. The deed must be filed with the county recorder’s office to update property records.
Types of deeds for gifting property
- Warranty deed – provides buyer with title protection
- Special warranty deed – provides title protection, but only against defects arising during seller’s ownership
- Quitclaim deed – provides no title protection; transfers the seller’s existing interest only
A warranty deed is most common for gifting property as it provides the recipient with the greatest protection.
Disclosure Forms
If you’re gifting a house, condo, or other type of residential property, state laws usually require you to complete a property disclosure form. This details the condition of the home for the recipient.
Disclosure forms require you to answer a series of questions about the property’s condition, improvements, defects, and more. This provides the recipient with information on the status of the home before accepting the gift.
Recording the Gift
Once you’ve filed the gift tax return and the recipient has the deed, it’s a good idea to record the gift. Recording provides legal documentation that the property was transferred as a gift rather than sold.
You can record the gift by making a copy of the return and deed and filing them with the county recorder’s office. This provides proof of the gift if questions ever arise later on.
Getting an Appraisal
To determine the value of the home gift for the gift tax return, you must get a qualified appraisal. This will provide a professional assessment of the current fair market value. The appraisal must be done no earlier than 60 days before the gift.
Appraisals also prevent undervaluation of gifts. The IRS will verify the value, and getting an accurate appraisal can help avoid gift tax issues.
Notifying Mortgage Company
If there is an existing mortgage on the home, you will need to notify the lender that you are transferring the property to a new owner. Get written approval from the lender before gifting the property.
The recipient typically must qualify with the lender and/or apply to formally assume the mortgage. Work with the mortgage company to meet any requirements they have for gifting properties.
Conclusion
While gifting a home, condo, or other real estate can be complicated, taking the right steps makes the process manageable. From filing gift tax returns to recording deeds, use the necessary gift forms and documents to ensure it goes smoothly. Consult legal and tax professionals as needed throughout the process.