How is gift tax levied?

[Torellian]

What is the name of your state (only U.S. law)? WI

I wanted to post this under "tax law", but there's a message there saying to post gift tax questions in this forum instead.

I'm currently paying off a private loan on my house and will be done with it in 7 months. Currently, my house has my Dad's name and my name on the title. This is because my Dad is the one I'm paying to. Once I'm done paying off the loan, we were simply going to remove his name from the title so I'd be the sole owner. I've heard that doing so would mean I'd have to pay a gift tax, because it looks as if my Dad is giving me his half of the house. But when does the government find out about the title change, and when/how is the fact that it's actually the result of a loan payoff mentioned? Do they send me a bill? Is it done at the time the title change happens, or is it somehow done when income taxes are filed? I'm afraid to just have the title changed and then just hope I don't get audited or penalized for not paying my "gift tax". After all, even top people in our current government didn't pay taxes they didn't know about, but it eventually came to light.

 

[anteater]

1) The person receiving a gift has no tax consequences.

2) The person giving the gift has the responsibility of filing a gift tax return for any gifted amount to any one person in excess of $13,000 per year.

3) However, each person is allowed to make reportable gifts of $1 million during their lifetime before actually having to pay a gift tax. And, if that person is unlikely to eventually be subject to the estate tax, then even using part of that $1 million exemption won't mean much.

4) Like many things in our tax system, we're largely on the honor system here. The IRS is not actively playing the "gift police" role.

For more information, take a look at IRS Pub 950:
http://www.irs.gov/pub/irs-pdf/p950.pdf

 

[tranquility]

You must file a gift tax return when there is a gift. The government will not just bill you.

Don't worry, because you have been properly reporting the interest paid on your tax return and father has been reporting the interest or imputed interest on his, you should have a good paper trail supporting treating the money as a loan. (It has been properly reported, right?) Also, if it is a loan, why didn't you change over the title immediately? What are you waiting for?

 

[Torellian]

You must file a gift tax return when there is a gift. The government will not just bill you.

Don't worry, because you have been properly reporting the interest paid on your tax return and father has been reporting the interest or imputed interest on his, you should have a good paper trail supporting treating the money as a loan. (It has been properly reported, right?) Also, if it is a loan, why didn't you change over the title immediately? What are you waiting for?

We didn't know there was anything to report so far. As for why the title hasn't been changed---we'll be changing it over to be in my name only after the loan is paid off by me. That will be in 7 months.

Also, he isn't charging me interest. So that hasn't been put on either of our tax returns.

 

[Torellian]

1) The person receiving a gift has no tax consequences.

2) The person giving the gift has the responsibility of filing a gift tax return for any gifted amount to any one person in excess of $13,000 per year.

3) However, each person is allowed to make reportable gifts of $1 million during their lifetime before actually having to pay a gift tax. And, if that person is unlikely to eventually be subject to the estate tax, then even using part of that $1 million exemption won't mean much.

4) Like many things in our tax system, we're largely on the honor system here. The IRS is not actively playing the "gift police" role.

For more information, take a look at IRS Pub 950:
http://www.irs.gov/pub/irs-pdf/p950.pdf

Thank you for that link! I read through a good portion of it, but as with all things related to the IRS, it started to get confusing. I think you simplified it in your 4 points though, which I appreciate.

I'm really surprised that it's the gift giver, and not the receiver that pays has to file and pay the tax. Usually it's the one who receives something that has to pay. I guess it's one of those times that if you give once, you have to give twice (once to a loved one, and once to the hated one; the IRS)

 

[tranquility]

As for why the title hasn't been changed---we'll be changing it over to be in my name only after the loan is paid off by me.

Then, it appears it was not a loan, but a gift from you to him. You were giving him money for no reason. The way property sales usually work is you get the property in exchange for the promise to pay. By doing it the way you are doing it it will be far harder to prove a loan.

Also, he isn't charging me interest. So that hasn't been put on either of our tax returns.

On "loans" of over a certain size between closely related parties, interest *must* be charged, or, the person making the loan will have what is called imputed interest and they must pay taxes on that imputed amount.

Why all this? Because without the rules all types of shennanigans can occur. See a tax professional. You may have a problem--as does your dad. You both may want to start treating this like a real event then a handshake/promise thing.

 

[Torellian]

Then, it appears it was not a loan, but a gift from you to him. You were giving him money for no reason. The way property sales usually work is you get the property in exchange for the promise to pay. By doing it the way you are doing it it will be far harder to prove a loan.

On "loans" of over a certain size between closely related parties, interest *must* be charged, or, the person making the loan will have what is called imputed interest and they must pay taxes on that imputed amount.

Why all this? Because without the rules all types of shennanigans can occur. See a tax professional. You may have a problem--as does your dad. You both may want to start treating this like a real event then a handshake/promise thing.

I think I should start from the beginning and provide some more details.

When I was first buying the house, it was $50,000. I paid $5,000 because that's all I had. My Dad paid the other $45,000, so the full amount was paid to the previous owner and no bank was involved. My Dad also had written up a promissory note that we both signed and both have a copy of that states that I agree to pay him certain amounts of money each month. Originally, that amount was to be $500 a month. After my income dropped, we verbally let it go down to $300 a month. That's what we're doing now. So there is a promissory note involved and we both have a copy with our signatures on it. Also, my Dad gives me a signed receipt every month when I pay him. Also, when hen the purchase was made, the house was titled with both of our names as joint tenants so it would make it easier for my Dad to take possesion of the house in the event of my untimely demise. Once my payments were made in full, then his name would be removed, and the house would only belong to me.

Does this change anything? I don't understand the part where you say this is actually a gift from me to my Dad. Since he paid for most of the house, and I'm living in it while making payments to him, then it would seem to clearly be a loan. I'm also paying all of the property taxes and insurance.

 

[tranquility]

I understand what's happening, but you need more facts and you may have to prove things up some day. A couple of facts are the amount of net investment interest you have and if the loan is a demand loan or not. The first, for the amount you're talking about, will guide the amount of imputed interest and the second will guide the gift tax ramifications for your below market loan.

See a tax professional and put this deal right. It shouldn't be much and everything will flow more smoothly even if they turn bad someday.

 

[Torellian]

I understand what's happening, but you need more facts and you may have to prove things up some day. A couple of facts are the amount of net investment interest you have and if the loan is a demand loan or not. The first, for the amount you're talking about, will guide the amount of imputed interest and the second will guide the gift tax ramifications for your below market loan.

See a tax professional and put this deal right. It shouldn't be much and everything will flow more smoothly even if they turn bad someday.

When you say I need more facts, what kinds of facts are you referring to? I'll try to provide them here if I can.

 

[tranquility]

I'm done, so I won't respond, but the facts you should bring to your tax professional are:

A couple of facts are the amount of net investment interest you have and if the loan is a demand loan or not.

 

[Torellian]

I'm done, so I won't respond, but the facts you should bring to your tax professional are:

Well, thank you for the help you've provided me so far. It's helped me figure out how to proceed from this point.