Tax Rules for Gifts and Related Party Transactions

The tax rules for gifts and related party transactions are very similar and simple. Here is a simple post that outlines the tax rules regarding gains and losses regarding gifts and related party transactions.

There are two types of gifts. The first type of gift is a present gift, a common example of a present gift is cash, property (realty & personalty) and bonds or notes. These gifts do not require the passage of time to become a gift. The second gift type is one with a future interest. A common example of a gift with future interest is a life estate.

According to federal taxation rules, the gift giver is taxed and the recipient is not taxed. Gift taxes are filed under form 706. The donor may exclude the first initial $14,000* (2013) under the single/head of household/married filing jointly status. [* The exclusion amounts are adjusted every year for inflation] A donor filing under married filing jointly can exclude the first initial $28,000. This annual exclusion cannot be used for gifts that have a future interest. This exclusion is per gift. Basically if a single individual gives  two gifts of cash worth $15,000, for a total amount of $30,000. The exclusion amount results to $28,000, and the remaining $2,000 is taxable.

There are unlimited exclusions for gift givers. If an individual makes a direct payment for education or to a health care provider for another individual, the whole amount is excluded from gift taxes. It is important to remember that the gift giver must pay directly for these expenses for that individual. Therefore the gift giver must not give the individual the cash, or it would not qualify for an unlimited exclusion. The other two unlimited exclusions result from payments made to a charity and marital deductions.

The taxpayer who receives a gift that is property, whether realty or personalty, can resell that gift. The holding period of the gift is actually carried over from when the gift giver bought the gift. If the gift giver held the gift for 2 years and then gave the gift, the recipient would use the same holding period. If so there are certain special rules that determine the gains and losses from the sale, here are the rules:

• If a taxpayer sells the gift at a higher price than the donor’s basis, the gain is the difference between the sales price and donor’s basis.


• If the taxpayer sells the gift in between the price of the donor’s basis and fair market value, there is no gain or loss that is recognized.


• If a taxpayer sells the gift at a lower price than the fair market value of the gift, the loss is the difference between the sales price and fair market value

Likewise the same rules apply for gains and losses that result from transactions with related parties. Related party transactions are defined as transactions that are committed between family members, with the exception of in-laws. Losses that arise from related party transactions are disallowed.

It is important to distinguish the holding period for gifts and related party transactions are different. The holding period for related party transactions start with the new owners period. The holding period for gifted property is the same as the donor's basis, unless the fair market value is used as the basis; then the holding period starts from the date of the gift is received.

Download for some practice:

• Property Tax Basis & Related Party Transaction Practice Sheet


• Property Tax Basis & Related Party Transaction Practice Sheet - Answers