Stock markets aren’t the only areas of the economy to suffer in challenging times like this COVID-19 pandemic. Real estate markets can also falter, driving down home values.

You may be able to take advantage of this situation by gifting property when the value of the home drops. Say you are a parent who has wanted to gift your adult children the family’s lake cottage as part of your legacy. Not only would giving them the home now be a generous act on your part, but it could also be a clever way to reduce estate and gift tax implications.

Staying Within Federal Gift Tax Limits

When you give gifts such as cash or property to friends and family members (as opposed to charity), you can give away only so much before it is taxed.

This amount is called the gift tax exclusion, and for 2020, it is $15,000 per recipient. If you are married, then you and your spouse can give $30,000. And if, for example, you have an adult child who is married—you could give up to $60,000 ($30,000 for your child and $30,000 for their spouse).

However, this doesn’t mean that you would necessarily have to pay gift taxes on property that is worth more than the annual gift tax exclusion. You could offset the taxes by drawing on the lifetime gifting limit of $11.58 million for individuals or $23.16 million for couples.

Any amount above the annual gift tax exclusion would count toward the lifetime gift tax exemption. In many cases, you’d be able to gift property without hitting this ceiling, especially if the property value has decreased in this declining market, as Retirement Watch editor Bob Carlson describes in Forbes.

One note about the lifetime gift tax exemption: $11.58 million may seem like an astronomically high number for most Americans, and you may be tempted to believe that the exemption won’t ever affect you. However, the exemption amount can change from year to year.

In 2026, it will drop to $5 million and could possibly decrease further to help pay for the country’s deficit. Obviously, more Americans will be impacted by a decreased exemption, and it’s important to incorporate changes, actual and potential, in your financial planning strategies.

Reducing Estate Taxes

There is another reason to consider giving while you are alive and home values have dropped: the estate tax. By gifting property now rather than after you pass, you could reduce estate tax implications since the property would no longer be part of your estate. The federal estate tax applies to estates with values exceeding the lifetime gift tax exemption.

Even though the recipients of your gift may end up paying capital gains taxes if they sell the property and realize a profit, these taxes may be significantly less than the estate taxes that would affect your heirs, depending on your wealth. As an example, the top tax rate for long-term capital gains is 23.8%. For estate tax, the highest tier is 40%.

Keep in mind, however, that the lifetime gifting limit does not exist in a vacuum. This limit is actually an estate and gift tax exemption. That means if you gift property that affects your lifetime gifting limit, it also reduces the amount you can exempt from estate taxes.

For example, say you gifted property worth $1 million more than your annual gift tax exemption. The estate tax would then begin at $10.58 million for individuals, rather than $11.58 million.

Other Considerations for Gifting Property

In times of recession or declining markets, we all want to help our loved ones. Your first inclination may be to give them cash, but that could reduce liquidity that you need. You may decide that giving them property is the best move, especially when you consider the tax implications.

However, you may also decide that, rather than giving them property outright, you will give it to them at a discounted price. In that case, the gift tax implications will be assessed based on the discount you are giving rather than the full value of the home.

Also keep in mind that you may not use workarounds like giving them your personal residence while you still live in the house. This maneuver could run afoul of tax laws, as MarketWatch explains, even if you then rent the house from the new owner.

Finally, it helps to understand any potential gift in the context of your financial goals. Mistakes could affect cash flow, retirement, taxes, and estate planning. You may find it helpful to speak with a fiduciary financial advisor or tax professional who can help assess your gifting plans in light of your entire financial situation.

We are all experiencing challenges as we work through the coronavirus pandemic and market variability. A financial advisor who provides comprehensive financial planning can help you assess how gifting property in this economy compares with other strategies, such as tax loss harvesting, and help you align financial opportunities with your needs.

This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.

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