What are the required steps and tax implications when a client gifts real property to a relative such as a nephew?
Ask Blue J any tax question, then go deeper. Follow up, add client-specific context, and explore the sources behind every answer with Blue J’s generative AI solution for tax research.
When a client gifts real property (land or buildings) to a relative such as a nephew, several legal and tax steps must be followed, and there are important federal tax implications to consider. Below is a comprehensive explanation of the required steps and the tax consequences, referencing the relevant provisions of the Internal Revenue Code and IRS guidance.
1. Legal Steps for Gifting Real Property
A. Prepare and Execute a Deed- The donor must execute a valid deed transferring ownership to the nephew. The deed should clearly state the intent to gift, include a legal description of the property, and be signed by the donor (and, if required, notarized).- The type of deed (e.g., warranty deed, quitclaim deed) determines the level of protection for the recipient.
B. Record the Deed- The deed should be recorded with the local county recorder’s office to provide public notice and protect the nephew’s ownership rights.- A title search is recommended to ensure the property is free of liens or encumbrances that could affect the transfer.
2. Federal Gift Tax Implications
A. Gift Tax Imposition
- Under IRC §2501(a), a federal gift tax is imposed on the transfer of property by gift, whether direct or indirect, and whether the property is real or personal, tangible or intangible.
- The donor (not the recipient) is responsible for any gift tax due.
B. Annual Exclusion
- For 2025, the annual exclusion is $19,000 per recipient. This means the first $19,000 of value given to the nephew in 2025 is excluded from gift tax.
- If the value of the property exceeds $19,000, the excess is a taxable gift.
C. Lifetime Exemption
- The donor can also use part of their lifetime gift and estate tax exemption, which is $13,990,000 in 2025. Gifts above the annual exclusion reduce this exemption.
D. Gift Tax Return Filing
- If the gift exceeds the annual exclusion, the donor must file IRS Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return) for the year of the gift.
- The return reports the value of the gift, the recipient, and how much of the lifetime exemption is used.
E. Valuation of the Gift
- The value of the gift is the fair market value (FMV) of the property on the date of the gift.
- A qualified appraisal is recommended to substantiate the FMV, especially for IRS reporting and potential audit.
F. Special Situations
- If the property is encumbered by a mortgage and the nephew assumes responsibility for part of the debt, the transaction may be treated as part sale/part gift. The amount of debt assumed is treated as consideration, reducing the amount treated as a gift.
- If the donor retains any interest (e.g., life estate), the value of the gift is reduced by the value of the retained interest, which must be calculated actuarially.
3. Income Tax Implications for the Recipient
A. Carryover Basis
- The nephew receives the property with a carryover basis—the same basis the donor had in the property at the time of the gift, increased by any gift tax paid attributable to the appreciation in value, but not above FMV at the time of the gift.
- This is important for future capital gains tax if the nephew sells the property. The gain is calculated as the difference between the sale price and the donor’s original basis (plus any allowed adjustments).
B. Holding Period
- The nephew also receives the donor’s holding period for the property, which can affect whether future gains are long-term or short-term.
4. State and Local Tax Considerations
- Some states impose their own gift or transfer taxes, and property tax reassessment may occur upon transfer. These rules vary by state and should be checked before the transfer.
5. Documentation and Family Considerations
- Maintain thorough documentation: deed, appraisal, Form 709, and any correspondence regarding the gift.
- Consider family dynamics and communicate clearly to avoid misunderstandings or disputes.
6. Summary of Required Steps
- Obtain a qualified appraisal to determine FMV.
- Prepare and execute a deed transferring the property to the nephew.
- Record the deed with the local county recorder.
- File IRS Form 709 if the value exceeds the annual exclusion.
- Disclose the gift to state authorities if required.
- Retain all documentation for tax and legal purposes.
7. Additional Notes
- If the transfer is structured as a sale for a note that the donor intends to forgive, the IRS may treat the entire transaction as a gift rather than a bona fide sale.
- Only the value of the present interest in the property qualifies for the annual exclusion; gifts of future interests do not.
In summary: Gifting real property to a nephew requires careful legal documentation, compliance with federal (and possibly state) gift tax rules, and proper reporting. The donor is responsible for any gift tax, and the nephew receives the donor’s basis in the property. Proper planning and documentation are essential to ensure a smooth and tax-compliant transfer.
Was this answer helpful?
What Blue J customers are saying
“We are excited to use Blue J to elevate the initial work product our team is able to produce."
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We had used Checkpoint for a long time but found it wasn’t particularly well-used in our practice."
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"We find this tool to be a game-changer for us and our clients.”
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“Blue J is an exciting technology because it enables the practitioner to remain in the driver’s seat of the analysis."
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"We wanted to have a tool that people were using at all staff levels."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
