TAXABLE GIFT EXCLUSION RAISED TO $12,920,000
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Good news for those seeking to gift or inherit real estate in 2023, the IRS applicable taxable exclusion amount for gifts (the total amount exempted from gift and/or estate tax) is raised to $12,920,000 ($12.92mm) per person, or $25,840,000 ($25.84mm) for a married couple filing jointly. That is an incredible amount, especially considering the relatively low amounts in the not-to-distant past.
This means most estates can pass their real estate holdings without issue. For example, leaving a property worth $3mm to your children will have no estate taxes due, presuming the remainder of the estate is under the overall limits. For the most part, even ‘average’ homes in Newport Beach and Orange County can be passed without concern for taxes in 2023. This includes inheritance and gifting of homes (i.e. gifting while alive).
However, it is easy to imagine coastal real estate exceeding these values. Newport Beach and Orange County real estate features trophy properties that cannot be duplicated, including many eight-figure sales. The heirs of those properties may indeed have an estate-tax concern.
Beware however, Proposition 19 may cause a property tax increase. Review our detailed article and video on Prop 19 here.
Key to remember, these increased allowances sunset in 2026 absent further congressional action (i.e. they go way down in 2026 absent a change or update to the current law).
GIFT EXCLUSION RAISED TO $17,000
The IRS annual exclusion for gifts (the total amount exempt from reporting) is raised to $17,000 per person (up from $16,000 per person in 2022).
This often-misunderstood threshold is merely the limit at which the IRS requires reporting. In other words, anything above $17,000 per person merely requires reporting of the gift to the IRS. (IRS form 709.) However, as noted above, the limits at which any taxes are due are far greater.
CAN I SELL MY HOME FOR BELOW FAIR MARKET VALUE
Yes! Indeed, many owners elect to gift or partially gift their homes to their children now, for many reasons, these current tax exemptions are often a factor.
Frequently, a sale at below fair market value can be easily (and legally) achieved to assist the child and/or allow ease of obtaining a new loan using a gift of equity to avoid any down payment. Yes, you can sell your home below fair market value.
Quit simply, the difference between the fair market value and the sales price is a gift. I.e. a home valued at $2mm is sold to a child for $400,000, then the difference, $1.6mm, is a gift from the parent to the child.
This strategy can also be used to avoid capital gains on the sale of the home. For example, if the parents purchased the home for $100,000, and it is now worth $3mm, there would be a substantial capital gains exposure on the sale of that home. However, if the parents sold the home to their child for $600,000, there would be no capital gains whatsoever (presuming they lived in the home and owned the home for the prior two years, they can deduct the IRS 121 applicable $500,000 from the profits and report the remainder as a gift). See our article on capital gains and the IRS Section 121 exclusion here for more details.
– Devin Lucas
Author Devin R. Lucas is a Real Estate Attorney, Broker and REALTOR®, specializing in Newport Beach, Costa Mesa and Orange County coastal communities, serving individual and investors in residential real estate.
Lucas Real Estate – Attorney Devin Lucas and CPA Courtney Lucas – are experts in residential real estate transactions, tax considerations, Trustee representation and California’s Proposition 19.
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