How to Calculate Capital Gains on Gifted Property?

Posted by Amr Tenney on Oct 19, 2022

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Gifting an asset to someone can provide for some large tax savings. This can mean millions of dollars gifted without paying taxes. It also helps that the gift tax rules aren’t difficult to follow. In this article, we’ll explore how gift taxes work.

Gift Tax Implications

In gift tax terminology, the donor is the person gifting, and the donee is the person receiving the gift.

For 2022, the total annual exclusion is $16,000 per recipient. This means if you give up to $16,000 to a single person in a year, nothing needs to be filed. 

Any amount over $16,000 per recipient is called a taxable gift. If Adam gives $20,000 to David, the $4,000 is a taxable gift and requires filing Form 709. A taxable gift doesn’t mean taxes are owed. Neither the donor nor the donee will have to pay taxes on the gift.

However, the $4,000 will count towards the donor’s lifetime exclusion. The gift tax is related to the estate tax. The lifetime exclusion is part of the estate tax. For 2022, the lifetime exclusion is $12.06 million. The $4,000 deducts from this amount, leaving $12,056,000 in the lifetime exclusion.

The lifetime exclusion is the amount that a donor can give without being taxed. Remember, this doesn’t include the $16,000 per person per year. Once the lifetime exclusion is used up, taxes will be owed on gifts over the $16,000 annual limit.

Couples can combine their exclusions for a total of $24.12 million.

It’s the donor’s responsibility to file paperwork for reporting the gift.

There is a step-up in basis for inherited property and assets. This means if you pass, your heirs will inherit property with a step-up in basis (i.e., market value rather than original cost basis). However, if an asset such as a stock is gifted while you’re alive, the donee will get your original cost basis rather than a step-up in basis. Same for a house.

Note that this article is only about gifts in the U.S. to people in the U.S. We didn’t cover foreign gifts, as they have tax implications and tax filings that are better discussed as a separate topic. Also, the question of what is and isn’t excluded in the estate should be discussed with your estate planner.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.

 

The above examples are hypothetical and demonstrate some mathematical principles. It does not illustrate any investment products and does not show past or future performance of any specific investment. Investing involves risk, including the loss of principal.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

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