Question

In 2017, Homer gave his favorite child Maggie a piece of land. The land has a basis to Homer of $300,000 and the FMV on the date it was given was $11,500,000. The FMV six months later was $8,000,000. There have been no taxable gifts made in the past by either Homer or his wife Marge.  

Homer comes to you, as his tax advisor and asks you what the tax implications (if any) are on this gift. He would like to know how best to minimize any tax liability. Please explain your advice and show any work for the tax calculation(s).

How would your answer change if this gift occurred in 2018?

Answer 1

As per IRS rules, the taxable gift amount on a gifted property is fair market value of gift minus annual exclusion allowed and lifetime gift exemption. In 2017, the annual exclusion was $14,000 per child and lifetime exclusion was $5.49 million. The fair market value to calculate the tax is the FMV of property at the time of transfer.

FMV = $11,500,000
Annual Exclusion = $14,000

Taxable Gifts in 2017 = Fair value of gift after annual exclusion - Lifetime Gift Exemption amount
=> $11,500,000 - $14,000 - $5,490,000 = $5,996,000

In 2018, the annual exclusion increased to $15,000 and no changes were made to the lifetime exemption. Since the FMV of the land was $8,000,000 after 6 months, we would consider this amount while calculating gift tax in 2018.

Taxable Gifts in 2018 = $8,000,000 - $15,000 - $5,490,000 = $2,495,000