Real Estate Developers May Be Able to Avoid Gift Taxes When Passing On Developer Units
In February 2016, two Central Park condos owned by then-candidate Donald Trump had an estimated market value of $790,000 and $800,000. In April 2016, Trump sold these condos to his son, Eric Trump, for pennies on the dollar ($350,000 each, to be exact).
For most people, this family-friendly sweetheart deal would typically incur hundreds of thousands of dollars in gift taxes. Not so for Donald Trump. Why? Because he was a real estate developer.
A real estate owner who sells a piece of property for less than it’s estimated worth typically has to pay gift tax on the difference between the sale price and the true market value, according to MSN.com. Any personal gifts worth more than $14,000 in a given year are subject to a federal tax that could be as high as 40 percent. However, in Trump’s case, since he the building’s developer selling the condos for the first time, he enjoyed a level of flexibility within the law to determine the estimated value of the condos.
Other taxes paid on the transaction indicate gift taxes were not paid by Trump. He reportedly paid a total of $13,000 in city and state transfer taxes, according to New York City property records. Those transfer taxes, according to a spokeswoman for the city’s Department of Finance, are not usually paid when “bona fide gifts” are involved. Furthermore, when a home sale is reported as a gift, buyers and sellers typically disclose that the sale is taking place between two relatives in the transfer records. The Trumps did not have such an indication.
The condo sales were disclosed in President Trump’s 2017 federal financial disclosure, which was released by the U.S. Office of Government Ethics. The buyers of the two condos were listed as two limited liability companies that were managed by Eric Trump.
This transaction likely means that Eric Trump will probably be able to sell the condos later on at a much higher price.
Strategies for Avoiding Unnecessary Gift Taxes
Obviously, unless you are a real estate developer, the gift tax avoidance strategy described above probably will not apply to you. However, there are other strategies you could potentially utilized under the tax code. For example, under current IRS regulations, if you make a gift in excess of $14,000, you must file a Form 709 to report the gift and pay tax on the amount above $14,000. The gift tax threshold for married couples is $28,000 per donee.
Here are some strategies that you could consider in making a gift in excess of the exemption amount without being subject to gift taxation:
- Pay someone’s medical expenses. Just make sure the payments are made directly to a third party medical institution or physician. The gift can’t be given to the donee directly or else it’s subject to the exemption limit.
- Paying someone’s college tuition. Like with the medical expenses, make sure the payments are made directly to a third party educational institution. If the payments go directly to the student, you fall in the gift tax zone.
- Make a gift to a qualified charitable organization formed under IRC 501(c)(3). This has a double benefit in that the contribution is tax deductible and is exempt from the gift tax limitation.
To learn more, sit down with an experienced trust and estate planning attorney in your area.