Tax Rules for Family Monetary Gifts
Ines Zemelman, EAJun-15-2017
We’ve all been there -- a sibling, an aunt, or a cousin, may need to transfer funds to your account for some reason - what are the tax consequences of such a transaction?
Inheritance situation - one family member receives funds and wants to transfer to you.
Our Dad passed away 3 years ago and now his house was just sold. I have now received a payment. I understand that the payment is not taxable. Please let me know if that is not the case.
My brother is asking if he can send his payment of ±18,000 into my US banking account. What implications are there if I receive such a payment that is not intended for me?
Firstly - let’s address the question of the house and if there will be any tax on the sale. 3 years ago when your father unfortunately passed, let’s say the house was worth $100k. If you sell the house now for 100k, you would not pay any tax. However, if you sold the house for $500k, you would have $400k of capital gains; ie your cost basis becomes the price of the home at the time of the receipt from your deceased father. Note - if several people inherited the property (as it appears they have), each would report the sale of the home on their respective tax returns and report his/her share of proceeds/capital gain. Note that sale of inherited real estate must be reported regardless of whether there was gain or loss. Gain would be taxable; loss will be disregarded if house was not used for rental business.
Now - as far as the 18k transfer from one U.S citizen to another. If your brother is married then $18K may be treated as a joint gift from a married couple. In such case they do not have to report it because each spouse can make an annual gift to anyone up to $14K without reporting (ie - 18k is less than the 28k combined gift threshold for reporting by a married couple filing joint return)
If he is single, or his spouse has already made a gift that year to someone else, he may transfer $14K to you this year and $4K next year - also without filing the gift tax return.
What if this is not a gift, but a temporary loan? How do I make sure this is not treated as a ‘gift’?
If this is not a gift and you will pay it back then it is treated as a loan. You and your brother should sign a promissory note (not necessarily to notarize but it may be notarized as well). The note should state the loan terms: when it should be repaid and what interest you will pay on that loan. It may be nominal 3% or 4% annual but interest is required to treat this payment as a loan. Then you are all set and should not worry about the tax consequences as it is not a gift.
What if one sibling inherited the property, but wishes to gift half of the proceeds to the other?
In the chance that one sibling inherited the property, but wishes to split the gain with the other after the sale, the gifter (assuming US citizen) would file Form 709 and report the gift. The sibling who inherited the property should also report the sale of the inherited property on his tax return and assume the 100% of the gain. The gift transfer will be not taxable to either of you.