Summary: If you are considering gifting a vacation home to a family member, you might want to do it while The Tax Cuts and Jobs Act exemptions are still in effect.
If you are considering leaving your vacation home to your family, it is important to keep in mind the potential taxes those beneficiaries might have to pay. Property owners can potentially avoid certain issues by taking advantage of current exemptions and careful estate planning.
When a person sells property, there is capital gains tax paid on the difference between the original price paid (also known as the basis) and the current sale price. There are exceptions to this, such as if the recipient was using the property as a primary residence, but the exemptions are unlikely to apply to vacation homes. Say, for example, a person inherits a vacation home purchased for $100,000 and then sells it for $900,000. The recipient would be subject to capital gains taxes on the $800,000 difference.
When a person gifts property during his or her lifetime, gift tax must be taken into account. Gifts above the annual exclusion amount ($15,000 for 2019) are subject to gift tax. Luckily for those considering gifting real property, which is almost universally worth more than $15,000, there is also a lifetime exclusion, which currently tracks with the estate tax exclusion. If gifts are given that are above the annual exclusion amount, a gift tax return must be filed with the IRS. No tax is actually due until the amounts gifted go above the lifetime exclusion amount, but filing the tax return is required so that the IRS can keep track.
Currently, under the current Tax Cuts and Jobs Act (2017), the estate tax exclusion is $11.4 million for individuals and $22.8 million for couples transferring wealth at the time of their death. This exclusion is in place until 2025; if it is not made permanent, the exclusion reverts back to $5 million per individual (adjusted for inflation). The gift tax has the same limits and any lifetime gifts are totaled up and reduce the estate tax exclusion upon death. While the tax laws may change at any time, giving gifts now under the current laws allows you to take advantage of the current exclusion amounts.
For vacation homeowners looking to take advantage of the current gift tax exclusions, it may be desirable to gift the property to family in the form of an LLC or a trust. This ensures that the vacation home remains in the family and allows the original owner to maintain interest and control over the property. A property owner can transfer the house into a limited liability corporation, which has some liability protection advantages, and give ownership shares to family members as desired. Placing the property in a trust also allows the owner to retain control of the property for the rest of their life, and then transfer it to the designated beneficiaries. It also allows the owner to specify who can use the property and for what purposes – which can cut down on friction in the family.
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