Watch Out! The IRS Is Searching for Gifts of Unreported Real Estate!

Posted By Jay Kaufman || 20-Mar-2012

In recent years, have you made a gift of real estate to your children or grandchildren or, for that matter, anyone? If you have, you need to read this article.

The Law. Transfer of real estate (or anything of value) from one person (donor) to another (donee) for less than fair market value is considered a gift for gift tax purposes. This is considered a separate tax system from our income tax system. Any gift in excess of $13,000 per year (per donee) must be reported to the IRS on a gift tax return (Form 709). From 2001 until 2011, the lifetime gift tax exemption was $1 million. Beginning in 2012, every individual has a lifetime gift tax exemption of $5 million. So, gifts of less the $5 million will be tax-free! (The value of the gift is based on the date of the gift not the date the return is filed).

The IRS Program. The Internal Revenue Service (IRS) has discovered that many gifts of real estate have gone unreported to the IRS. This is potentially a loss of significant revenue for the IRS. As a result, the IRS has initiated a project where they are reviewing real estate transactions in large metropolitan areas against gift tax returns filed. This can be an innocent trap for an unknowing family. Unfortunately, the IRS will not reduce taxes, penalties and interest for taxpayers who claim ignorance of (an admittedly little known and less understood) law. Further, and most importantly, if the taxpayer files the back returns before the IRS catches up to them, serious penalties and problems can be avoided (though not necessarily entirely). This is not a time or place to bury one’s head in the sand or play the audit lottery!

Take Action. If you made a gift of real estate at any time in the past (or an interest in a land trust or any significant gift of any type of property at all) and the gift was not reported to the IRS on Form 709, you need to consult with a knowledgable estate and gift tax attorney to ascertain: whether or not you have to file, what if anything you have to do, and what, if any, are the potential consequences. There is no statute of limitations. Failure to file a gift tax return could affect your heirs significantly upon your death. As a result, this is a subject that requires immediate attention.

A gift tax return can be filed at any time. There may or, in many cases, may not be tax due. The IRS has three years to audit the return once appropriately filed. Otherwise, if it is filed in accordance with various IRS rulings concerning appropriate valuation, appraisal and disclosure, the values on the return are deemed accepted by the IRS. Thus, the return needs to be filed by an experienced estate and gift tax attorney.

If you have made a gift – particularly of a real estate interest – and have not reported it to the IRS, pick up the phone and get advice about what to do – now.

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