Overview

• Taxpayers who give their children gifts of real property can give tax-free gifts up to the maximum gift amount. Children who receive gifts from their parents are not required to pay federal income taxes on the value of their gifts. However, some states have implemented gift tax requirements on transfers of personal and real property, and although children are not responsible for paying federal income taxes on their gifts, they may have to pay state income taxes, depending on state law. Furthermore, although the IRS does not impose initial income taxes on recipients' real property gifts, it may impose income taxes during subsequent transfers.
  
  

Federal Gift Tax Laws

• The Internal Revenue Code allows taxpayers to give gifts of real property without paying federal income taxes if the fair-market value of their property does not exceed the annual gift-giving exclusion. The Internal Revenue Code requires that taxpayers who give gifts exceeding the allowable annual threshold report their gifts by filing a Form 709, U.S. Gift Tax Return (and Generation-Skipping Transfer). They will be required to attach an appraisal by a certified real estate appraiser to establish the fair-market value of their transfers and to ascertain their incidental income tax liabilities.
  
  

Real Property Gifts

• Under federal tax code, real property gifts trigger income tax liabilities upon subsequent transfers. In other words, a child who receives a real property gift from his parent is not responsible for paying federal income taxes when he initially receives his gift. However, if he subsequently sells his real estate or gives his gift to a third party, he may have to pay income taxes based on the adjusted basis or fair-market value of his gift when he received it. Thus, he may have to pay taxes on the difference between the fair-market value when he initially received his gift and the fair-market value when he sells or gifts his real estate.
  
  

Gift Tax Limits

• The IRS allows parents to give each of their children gifts of up to $13,000 annually without having to pay federal income taxes on their gifts. Additionally, the tax code allows married taxpayers to add their gift limits together to make joint gifts. Thus, parents can give each of their children a gift of up to $26,000 annually, as of 2011. For example, parents with two children can give each of their children real estate with a fair-market value of $26,000 annually.