July 9, 2005


Tax lurks in gift of property to unmarried partner or friend

A story published today in the Seattle Post Intelligencer observes that it is not uncommon for a property owner to add the name of another person -- a significant other, a spouse, a child or a parent -- to a deed or a co-op stock certificate. But doing so can have important federal tax ramifications.

"People put other people's names on deeds all the time," said Susan Lee, a tax and financial planner in New York. "And that can end up being a real problem for, among others, gay couples and unmarried heterosexual couples."

Lee said that someone who adds another person's name to a deed or co-op stock certificate is often unaware of the tax ramifications, both immediately and many years down the road.

Giving someone else an interest in one's property -- without being paid for it or receiving some other form of consideration -- constitutes a gift and could trigger the need to file a gift-tax return.

Lee explained that under current federal tax law, an individual can give another individual who is not a spouse no more than $11,000 in a calendar year without having to file a gift-tax return. (The giver can make any number of gifts of $11,000 or less to different people without having to file a return; there is no limit on the amount one spouse can give another.)

So, she said, if a husband adds a wife's name to a deed that is in his name only, there is usually no necessity to file a gift-tax return.

But, Lee said, if an unmarried life partner, for example, gives a significant other an ownership interest in a home or apartment, the donor is deemed to have made a gift of one-half of the value of the equity in the property -- and the donor must file a federal gift-tax return reporting the amount.

Whether gift tax is due depends on the circumstances.

Martin Miller, a New York tax lawyer, said that the donor could be subject to taxation at a rate that can range from 41 to 47 percent of the amount of the gift.

But, Miller said, current tax law exempts from taxation the first $1 million in gifts made over a lifetime. (That amount is above and beyond gifts of less than $11,000.)

So, Miller said, if the equity in a home or apartment is, say, $1 million, and the owner adds her life partner to the deed, the owner would have made a reportable gift of $489,000 ($500,000 less $11,000) and would have to file a federal gift-tax return.

Since the amount of the gift is less than the $1 million lifetime gift-tax exclusion, no gift tax would be due.

But, Miller said, the conveyance still has tax implications because the amount of the reportable gift reduces the amount that can pass tax-free through the donor's estate.

He explained that while the tax code allows a person to give away up to $1 million in reportable gifts over a lifetime without having to pay gift taxes, another provision of the code allows an individual to leave an estate of up to $1.5 million before estate taxes are assessed.

But, Miller said, any reportable gifts made during a lifetime reduce the $1.5 million exclusion.

(The estate-tax exclusion increases to $2 million in 2006.)

So, in the previous example, while the donor would not have to pay tax on the $489,000 reportable gift, her estate-tax exclusion would be reduced by that amount, leaving only about $1 million (or about $1.5 million after this year) exempt from taxation.