You can reduce your taxable estate by gifting away your assets while you are alive. As the gift giver, you are responsible for paying any gift tax that might be due on the land. If the value of your land gift exceeds the Internal Revenue Service threshold, you must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, whether you owe gift tax or not. If you are the gift recipient, you won’t have a taxable event until you sell the land.
IRS Gift Regulations
Under IRS regulations, you must value the land at its fair market value minus any allowable deductions, such as the property tax deduction. The fair market value is the price the land would sell for on the open market to an unrelated buyer. If you don’t know the value, a real estate agent or a property appraiser can provide you with that. The IRS imposes penalties for gifts that are undervalued, so it’s well worth your time to have the land accurately valued.
Annual Gift Tax Exclusion
As the gift giver, you can apply the annual gift tax exclusion to offset some of the gift tax liability. For 2013, the annual exclusion amount is $13,000. Since most land is worth more than $13,000, you are responsible for paying gift tax on the difference. For example, if you give a parcel of land worth $50,000, you subtract the $13,000 exclusion to come up with your taxable gift amount of $37,000. The 2012 top gift tax rate is 35 percent. You can multiply $37,000 times 35 percent to get your maximum gift tax amount of $12,950.
Unified Tax Credit
You can avoid paying gift tax on the land by using your unified tax credit. The unified tax credit is a lifetime credit that offsets your gift tax and estate tax liability. For 2013, the unified tax credit is $1,772,800. For example, instead of paying the maximum gift tax amount of $12,950, you can apply $12,950 of your unified credit to reduce your gift tax liability to zero. Your unified credit is reduced by $12,950 to $1,759,850.
Capital Gains Tax
As the gift recipient, your basis in the land is the gift giver’s adjusted basis. The adjusted basis is the price the gift giver paid for the land plus any improvements she made. You do not have a gain or loss to report until you sell the land. If you sell the land for more than the basis amount, you may have to pay capital gains tax on the profit. If you sell the land for less than the basis amount, you may be able to use the loss to offset your other capital gains and lower your tax liability.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.