Many clients and others have asked if they could sell their house to their children for $1 to avoid gift tax. The short answer to that question is “no”. Any transfer for less than fair market value to an individual is a gift. For example, if the residence being gifted is valued by a real estate appraiser to be $100,000, and the residence is sold to children for $1; there will be a transfer subject to gift tax of $99,999!
Whether or not a transfer results in the payment of gift tax depends on several factors. Under both Federal gift tax law and Tennessee gift tax law, each individual can gift up to $13,000 to each child without incurring a gift tax. This is referred to as the Annual Gift Tax Exemption amount. However, Federal law and Tennessee law differ on how gifts in excess of the Annual Gift Tax Exemption are taxed.
Federal law currently provides for an additional lifetime gift exemption amount of $5 million. Any exemption not used during lifetime can be used at death. But Tennessee law does not provide for an additional lifetime gift exemption amount. In other words, any gifts from an individual to a child in excess of the Annual Gift Tax Exemption amount will be subject to Tennessee gift tax at rates ranging from 5.5% to 9.5% depending on the total value of the taxable gift. Each state has separate gift tax laws, so residents of states other than Tennessee and gifts made of real estate located in other states may have different tax rules that apply.
Therefore, making gifts (or sales for less than fair market value) to children of assets, especially real estate, can be wrought with potential gift tax traps. Please contact us if you need assistance in making tax-efficient gifts to your children or if you have any related questions.
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