Strategies to Avoid Gift Tax on Property: A 2025 Guide

Transferring property to family members can be a meaningful way to share wealth, but navigating the tax implications is critical. Based on our experience assessment, the most effective strategies often involve leveraging annual exclusions, lifetime exemptions, or opting for inheritance to capitalize on a stepped-up basis, which can minimize capital gains taxes for the recipient. For many, inheriting property is more tax-efficient than receiving it as a gift due to this basis adjustment. This guide outlines the key regulations and practical methods for transferring real estate while minimizing gift tax liability.

What is the Federal Gift Tax?

The gift tax is a federal levy on the transfer of property or assets where the giver does not receive something of equal value in return. It is crucial to understand that this tax is the responsibility of the person making the gift, not the recipient. The tax only applies when the total value of gifts to one person within a year exceeds the annual gift tax exclusion or when an individual's lifetime gifts surpass a specific exemption amount. Transfers that qualify as gifts include real estate, cash, stocks, and other valuable assets.

How Does the Annual Gift Tax Exclusion Work?

The IRS permits individuals to gift up to a certain amount per person each year without any tax consequences or reporting requirements. This is known as the annual gift tax exclusion.

• 2025 Exclusion Amount: The limit is $19,000 per recipient.
• Gift Splitting for Couples: Married couples can combine their exclusions, allowing them to gift $38,000 to any one person in 2025 without filing a gift tax return.

This method is highly effective for transferring partial ownership of a property over time. By gifting shares of the property's value each year while staying under the exclusion limit, you can gradually transfer full ownership without triggering the gift tax. However, this strategy is less practical for high-value properties, as the transfer process could take many years.

What is the Lifetime Gift and Estate Tax Exemption?

For larger transfers, the lifetime gift and estate tax exemption becomes relevant. This is the total amount an individual can give away during their lifetime and at death without incurring federal estate or gift taxes.

• 2025 Exemption: The amount is $13.99 million per individual ($27.98 million for married couples).
• Reporting Requirement: If you gift property valued above the annual exclusion, you must file IRS Form 709. The value exceeding the annual limit is then deducted from your lifetime exemption.
• Future Change: It is important to note that this high exemption amount is scheduled to decrease significantly after 2025.

Using this exemption for a large gift today reduces the amount available to shield your estate from taxes later, a key consideration for long-term estate planning.

6 Strategies to Minimize or Avoid Gift Tax on Property

1. Can You Transfer Property Value Over Multiple Years?

By gifting portions of the property's equity each year while remaining within the annual exclusion limit, you can systematically transfer ownership. This avoids immediate tax liability and preserves your lifetime exemption. The primary drawback is the time required for a full transfer, which may not be suitable for all situations.

2. Is Gift Splitting with a Spouse an Option?

Gift splitting allows a married couple to treat a gift made by one spouse as if it were made equally by both. This effectively doubles the annual amount that can be given to any one person tax-free. Both spouses must consent to this election on IRS Form 709.

3. Should You Use Your Lifetime Exemption?

For a property whose value far exceeds annual limits, using a portion of your lifetime exemption is a direct approach. You can transfer the entire property at once by reporting the gift. While no tax is due immediately, the property's full value is subtracted from your remaining lifetime exemption.

4. Is Inheritance a More Tax-Efficient Path?

Often, the most advantageous method is for the recipient to inherit the property upon the owner's death. The reason is the stepped-up basis. When someone inherits property, its tax basis is "stepped up" to its fair market value at the date of death. This can eliminate potential capital gains taxes for the heir if they decide to sell shortly after inheriting. In contrast, a gifted property carries the original owner's lower cost basis, potentially creating a large capital gains tax bill for the recipient upon a future sale.

5. Could an Irrevocable Trust Be Beneficial?

Placing property into an irrevocable trust removes it from your taxable estate, which can help avoid future estate taxes. However, this strategy involves permanently relinquishing control over the asset. Once the property is in the trust, you cannot sell it or use it as collateral.

6. Are You Gifting to a U.S. Citizen Spouse?

Gifts between spouses who are U.S. citizens are generally unlimited and free from gift tax. This means you can transfer property of any value to your spouse without triggering a tax liability or filing requirement. Different rules apply if the recipient spouse is not a U.S. citizen.

What Are the Important Non-Tax Considerations?

Beyond taxes, several critical factors should influence your decision:

• Loss of Control: Gifting property means you irrevocably give up ownership and all associated rights.
• Medicaid Eligibility: Gifting assets can trigger a five-year "look-back" period, potentially making you ineligible for Medicaid benefits if you need long-term care.
• Capital Gains for Recipient: As noted, gifting typically results in a higher capital gains tax burden for the recipient compared to inheritance.

Before transferring any property, consulting with a qualified tax advisor or estate planning attorney is strongly recommended. They can provide guidance tailored to your specific financial situation and goals. The best strategy depends on the property's value, your overall estate, and your long-term objectives.