Last March (2010) at the Estate and Gift Tax Conference of the Taxation Section of the California State Bar, an IRS representative reported that the IRS was launching a “compliance initiative” intended to uncover unreported gifts of real estate. While the initiative is not aimed at same-sex couples, it is likely to affect many such couples. That is because RDPs, same-sex spouses, and cohabitants often change title to the home once they begin living together. And they rarely file a gift tax return. Yesterday the Wall Street Journal reported that this program is well under way in many states but has hit a snag in California.
The IRS has reported that 60% to 90% of taxpayers who transfer real estate to a relative do not file a gift tax return. Gift tax returns are required for any transfer of property that exceeds $13,000 in value. No tax is due and payable until cumulative gifts (in excess of the $13,000 annual exclusion) exceed $5.0 million. Even though no tax may be due, a gift tax return is required. Otherwise how would the IRS be able to keep track of cumulative gift giving?
Many people do not think that merely putting a partner or cohabitant on the deed to the home is a completed gift. This is especially true for people who change the title on their homes to own it as joint tenants with right of survivorship. Often the transferor views this as a transfer that won’t take effect until death. But that is not true under state property law. The creation of the joint tenancy vests the new owner with a 50% interest in the home immediately. That makes the transfer a completed gift.
The IRS has been perusing public records looking for possible violations of the gift tax reporting rules. In California, the IRS asked the state Board of Equalization to provide records of real estate transfers that, under Prop 13, are protected from reassessment. All such transfers would occur between family members and would thus fall in the class of transfers most likely to produce a record of failure to report the gift.
The Board of Equalization (BOE) refused and so the IRS went to federal court and asked the court to order the BOE to comply with its request. On May 20, 2011, the court denied the IRS request. Read the court’s order here.
