Lifetime Gifts – Property and Real Property

Gifts of property may be made by a person during his or her lifetime, or after their death. Gifts made after death are discussed generally with wills and trusts, and nonprobate transfers.

Property is divided into two basic types: personal property and real property. “Personal property” is all property other than real property. “Real property” is synonymous with real estate and interests in real estate. The gift rules are different for each type of property.

Gifts of Personal Property

To make a valid lifetime gift of personal property, the gift must be in writing, duly acknowledged and recorded, or actual possession of the gift must be passed to and remain with the donee (the gift recipient), or someone claiming under him or her.

Gifts of Real Property

To make a valid lifetime gift of real property, the transfer must be by a properly executed deed or instrument of conveyance, and delivered by the party making the gift, or by his or her authorized agent. Every deed or conveyance of real property must be signed by the donor (the person making the gift) and properly notarized. The deed or instrument of conveyance should be recorded in the office of the county recorder where the property is located.

Gift Tax

A person who makes a gift of property during his or her lifetime may be subject to federal gift tax. Most gifts are not subject to the gift tax, however. There is usually no tax if the gift is made to a spouse. If a gift is made to someone else, the gift is not subject to tax unless its value exceeds the amount of the annual gift tax exclusion for the year.  If the value of the gift exceeds the gift tax exclusion amount, the donor may choose to use part of his or her lifetime estate and gift tax exemption to avoid payment of gift tax.

A person contemplating making a gift should consult his or her tax advisor, or contact the Internal Revenue Service for the amount of the current year’s annual exclusion and combined estate and gift tax exemption. For those interested in this subject, the author suggests obtaining a copy of IRS Publication 950, Introduction to Estate and Gift Taxes. This publication may be obtained online from the IRS’s website, www.irs.gov.

Generally, a person will need to file a gift tax return only if a gift is made to someone other than that person’s spouse and the value of the gift is more than the annual gift tax exclusion for that year. A person who receives a gift will not have to pay any gift tax because of it, nor will that person have to pay income tax on the value of the gift.

A person making a gift cannot deduct the value of the gift, unless the gift is made to a qualified charity. In that case, the gift may be a deductible charitable contribution. Here, again, a qualified tax advisor should be consulted before the gift is made.