When property owners are working on their estate plan, the topic of property transfer may be considered. Some owners may consider making that property transfer while they are still living and may consider selling the property to a family member for only $1. Yes, you can sell any of your property for any dollar amount that you wish. However, the owner should be wise and consider the tax implications associated with the property transfer.
When selling property for $1, or an amount that is grossly undervalued, the property owner could face a responsibility to federal gift tax on the property. During estate planning, many people try to avoid estate taxes in the future when their children inherit property. There are many factors that need to be considered with tax implications. Federal gift tax and federal estate tax are related, but they do have differences. The timing of when ownership of assets occurs will determine which tax is to be paid. Both taxes have the same federal exemptions, but those are determined through other factors. It is always best to work with an estate planning professional to fully understand your tax implications when drafting your estate plan.
Here are some scenarios to consider:
- If you sell the property to a family member for $1, you will be subject to federal gift tax during your lifetime. The IRS would consider this type of transfer a gift due to the under-compensated value.
- If you sell the property to a family member for $1 while remaining at the property, your estate will be subject to federal estate tax at the time of your death.
- If you sell the property to a family member for $1, and then continue to rent the property from your family member there will still be tax implication. Paying rent will not be paying your family member for the full value of the property.
- If you sell the property to a family member for $1, the family member may be subject to capital gains tax if they choose to sell the property.
Lastly, there is the lifetime exemption rule that will come into play at the time of your death. Currently, the lifetime exemption rate in 2019 is $11.4 million dollars. A lifetime exemption rate is that you can give away that much money in your lifetime or from your estate after death without incurring taxes.
Develop a plan
You can learn more about all of these scenarios when working with your estate planning professional. Tax laws may also vary by state. When considering property transfers, it is always best to work with a professional for tax advice and guidance. Expert advice is a valuable tool, and will protect you, your estate, and your family from do-it-yourself pitfalls. Trying to avoid taxes is not a game or a bargain hunt. By working with an estate planning professional, you can rest assured that you have developed the best plan possible for you and your family.
