Q-1:
Subject: A gift tax Question
I am in a domestic partner type relationship (i.e., I am not married but have signed domestic partner papers). We own a house with a mortgage (title: tenancy in common via a living trust). If My partner wants to pay of the mortgage will that constitute a gift to me? I am assuming so. So let’s say the remaining balance is 100,000. If he pays this off, my half of the note is 50,000 so the amount of the gift is 50,000? Is there a way to avoid a gift tax on this.
Thanks
A-1:
You both should really be working with a professional tax advisor to see that things are set up as you want them to be.
There are some things that should be considered related to your question.
Joint ownership of property doesn’t always mean that each owner has an equal share. It is quite common for one person to invest more money into a property than the other does, giving him/her a higher ownership percentage. The key is to document this so that a proper accounting can be done of each person’s share of a property, especially at the time of sale or death of an owner, when determining what is to be included in his/her estate.
In your example, if your partner’s pay-off of the loan gives him a comparably higher ownership percentage in the property, there is no real gift to you. If, on the other hand, he designates that you still own a full 50% of the property, which has seen its equity increase by $100,000, there would be a gift of $50,000 to you.
While gifts between conventional married spouses are not required to be reported to IRS, they don’t afford the same status to domestic partners. If gifts of over $11,000 are made to you in 2005, your partner would have to file a gift tax return (Form 709) to report the total for the year. Actual gift tax would only be payable if he has already exceeded his lifetime exclusion of one million dollars. If that hasn’t been used up, the excess gift can be applied against that amount. A running tally of how much of the lifetime exclusion has been utilized is reported to IRS on future 709s, as well as on the estate tax return (706) after he passes away.
What I have seen many people in this situation do in order to avoid having to file 709s is to spread the gift out over multiple years based on the annual exclusion. For example, he could gift you $11,000 of equity in the house in 2005, another $12,000 in 2006, $12,000 more in 2007, and so on until you are back to completely equal (50/50) ownership.
If you haven’t already checked out the books at Nolo Press, they have some excellent ones on how domestic partners can properly document things such as each one’s share of jointly owned assets.
Again, these are just some of the points you both will need to discuss with your personal tax advisor.
Good luck.
Kerry Kerstetter
Q-2:
Kerry
Thanks for your speedy reply. I like your suggestion of just doing the gifting in various years. I will read the Nolo books and decide if I should consult a professional to make sure we are doing everything correctly. Basically most of my stuff is very straight forward and I use Turbo tax when filing.
Of course while I was trying to figure out the gift tax question….I realized we might have messed up. In the early 1980’s my partner changed his brokerage account from his name to mine and his name in a Joint Tenants type of acct. The account still had his SS# and he paid all the taxes on the dividends and sales. 10 years ago (1995) we each had an attorney create a Living Trust. We had the brokerage account changed from both our names to just my partner’s trust name. After reading all the gift stuff….I can see that when we added my name to his account as a joint tenant that might be considered a gift….is it too late to file anything….I mean it has been in only my partner’s name for the last 10 years….will the IRS coming chasing after us?
Many thanks for your advice
A-2:
From the way you described things, it doesn’t sound as if there was an actual gift just because your name was added to his account. It would be a gift if you had actually obtained economic benefit by using the money or stocks in those accounts. It sounds like it was only a titling for convenience.
This is a very common set-up with elderly parents, who put their kids’ names on their bank accounts as either joint owners or POD (payable on death) in order to ensure fewer hassles if something were to happen to them (the parents). Without this step, if a parent were to pass away or become incapacitated, their accounts would be frozen and it would be impossible for their survivors to pay bills while the estate is probated. As long as the kids aren’t actually dipping into the money, IRS doesn’t have any problem and considers this to be a case of “titling for convenience.”
As long as the income being generated by the account is being reported on tax returns, IRS is fine, which is how it sounds with you two. I’m assuming that you and your partner are each beneficiaries of the each other’s living trust, which should give you quick access to any financial accounts in the event of the death of either one.
I hope this helps.
Kerry Kerstetter
Follow-Up:
Kerry
This does help. Thanks so much. I am getting a Nolo book this week. We have to go to Cleveland for Christmas stuff and it will give some good time to read up on what we are doing. I owe you for all this info. If you come to SF let me know and I will take you to dinner.
Tax Guru - Ker$tetter Letter 