best Gifts, not bequests, are transfers of assets made before the original owner dies, and the tax code distinguishes the two. People are occasionally given real estate or other property as a gift...but they do not want it. They'd rather sell it and get paid for it. If they elect to sell, beneficiaries of gifted property face different tax repercussions than recipients of inherited property.
If you sell for less than fair market value, you've made a mistake.
Even if the present is in cash, the Internal Revenue Service (IRS) does not consider it income. You won't owe the IRS a thing if your wealthy grandmother gives you a million dollars in cash.
When a gifted asset is received, the recipient does not pay taxes or declare income, but the donor of the property must report it and may pay the gift tax, subject to certain exemptions and exclusions. To alleviate any potential tax burden, the donor might choose between an annual exclusion and a lifetime exemption.
The Annual Exemption and the Lifetime Exemption are two types of exemptions.
As of 2021, you can give away $15,000 per year in cash or property to anyone without paying gift tax.
3 You have two alternatives if you want to give more per person every year:
In that tax year, you can pay the gift tax.You can put it on your lifetime exemption as a "charge."As of 2020, the lifetime exemption is $11.58 million.
4 That's a significant number of gifts. Each present you give over $15,000 per person every year reduces it progressively. If you have any money left over after you die, it will prevent your estate from paying the estate tax if the value of your estate is equal to or less than the remaining lifetime exemption.
An Illustration of the Gift Tax
If you sold your grandmother's artwork, which is valued at $1 million, for only $500,000, the IRS deems you to have given a gift worth $500,000 to the buyer. That's $485,000 more than your yearly $15,000 exclusion, so you'd have to pay gift tax on the difference or deduct the $485,000 from your lifetime exemption of $11.58 million.
The Cost Basis of Gifted Property for Capital Gains
What if you instead decide to sell the gift for its fair market value? You must declare any capital gains or losses, and if you make a profit, you may owe capital gains tax.
The original owner's cost basis in the asset is used to assess capital gains or losses on gifted property received during the donor's lifetime. If you were to inherit the property instead, its cost base would be "stepped up" to what it was worth on the date of their death—that is, if the original owner opted to wait until their death to pass it on to you. 5
This can have a significant impact. The gift basis is the price paid for the property by the original owner, plus or minus any changes. Significant repairs and upgrades, as well as any fees made in the sale, such as broker's commissions, are common changes that boost basis.
You can contact our accountants for assistance with both accounting procedures. Contact one of our best-chartered Accountants in Croydon to learn more about our online accounting services. We're only a mouse click away! We offer cost-effective accounting, payroll, and taxation services!
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