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Property Transfer Tax Implications: Understanding the Adjusted Tax Base

Examining in-depth estate planning strategies, we delve into the intricacies beyond basic savings tactics. In the realm of estate distribution, assets can be moved to others via four means: trade, sale, inheritance, or presentation. Each method presents its own set of benefits and drawbacks, as...

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Property Transfer Tax Implications in Estate Planning Basics
Property Transfer Tax Implications in Estate Planning Basics

Property Transfer Tax Implications: Understanding the Adjusted Tax Base

### Title: Tax Implications of Gifting Appreciated Property: Navigating the Complexities

Gifting appreciated property can be a strategic move for both donors and recipients, but it comes with significant tax implications that must be carefully considered. Here are the key points to understand:

#### For the Donor

1. **Gift Tax**: Donors can gift up to $17,000 per recipient annually without tax consequences. Beyond this, donors use their lifetime exemption, which is the same as the estate tax exemption threshold. Exceeding this threshold may result in gift tax. If larger gifts are made, the donor may need to file a gift tax return.

2. **Basis of Gifted Property**: The recipient's basis for calculating a gain is the donor's adjusted basis if the fair market value (FMV) of the property at the time of the gift is less than the donor's adjusted basis. If the FMV is equal to or greater than the donor's adjusted basis, the recipient's basis is the donor's adjusted basis. If the FMV is greater, and the donor paid a gift tax on the gift made after 1976, the recipient's basis is increased by the gift tax paid on the net increase in value.

#### For the Recipient

1. **Capital Gains Tax**: The recipient inherits the donor's basis if the FMV at the time of the gift is not less than the donor's adjusted basis. If the property is sold, capital gains tax is owed on the difference between the sale price and the recipient's basis.

#### Potential Tax Strategies

1. Gifting appreciated assets can be part of a tax strategy to reduce capital gains taxes, as the donor may avoid paying taxes on the appreciation while the recipient only pays on future gains. However, if the property is expected to appreciate significantly, holding it until death might be more beneficial due to the step-up in basis, which could eliminate most capital gains taxes.

#### Considerations

1. **Estate Planning**: Gifting can be part of broader estate planning to reduce estate taxes and ensure efficient distribution of assets. 2. **Tax Planners and Attorneys**: It is advisable to consult with tax professionals to optimize strategies and avoid common mistakes that could cost heirs a significant amount in taxes.

#### Other Factors

1. **Co-ownership**: Co-ownership of real property can be held as tenancy in common, joint tenancy with right of survivorship (JTRS), or tenancy by the entirety. Co-ownership of personal property can be held as JTRS or tenants in common. 2. **Estate Valuation**: Special use valuation can lower the value placed on farm property for estate purposes, reducing estate settlement costs. 3. **Business Tax Breaks**: Certain tax breaks are available for farm and other businesses, making it easier for the business to continue operation when such property passes through the estate settlement process. 4. **Ohio Special Use Valuation**: Ohio allows a special use valuation election that gives a maximum $500,000 reduction in value. 5. **JTRS Bank Accounts**: JTRS bank accounts held by a parent and child do not reduce estate taxes and are generally not recommended. 6. **Scenario A and Scenario B**: If the farm was sold by Grandson after being initially purchased by Grandfather for $30,000 and appraised at $100,000 when transferred to Son, and $300,000 when transferred to Grandson, gifting appreciated property to an heir and then inheriting it back can minimize transfer costs through generations. 7. **Lifetime Exclusion (Unified Credit)**: Each person has a lifetime giving exclusion (unified credit) that can exclude federal gift taxes. Selling property can result in income tax due to capital gains, even when sold to an heir. Sale, inheritance, and gifts each have their own advantages and disadvantages, and the best method depends on the specific circumstances. 8. **Allocation of Unified Credit**: The unified credit can be allocated at different times to offset gift taxes, but gifts over the annual exclusion use up the exclusion amount.

In conclusion, gifting appreciated property can be a strategic move to reduce capital gains taxes, but it is crucial to consider the tax implications for both the donor and the recipient. Consulting with tax professionals and carefully planning estate strategies can help navigate these complexities and ensure the most beneficial outcome.

  1. To optimize tax benefits, the donor might consider investing in real-estate or even crops, as gifts of these appreciated assets could help reduce capital gains taxes.
  2. A savvy financial approach might incorporate multiple strategies, such as gifting appreciated real-estate, investing in crops, and making smart decisions about co-ownership and estate planning, to minimize tax obligations for both donor and recipient.

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