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A friend of mine who lives in Atlanta asked about the tax implications of adding his domestic partner to the title on his house. He currently has sole ownership of the house, but thinks he might one day want to own the house jointly with his partner.
The IRS treats adding someone else to title on property as giving a gift of half the property’s value to that person, no matter who that person is. However, when the recipient is an opposite-sex spouse, the gift qualifies for the unlimited marital deduction. That means the gift will have no tax consequences.
On the other hand, when the recipient of the gift is a same sex domestic partner, the original owner of the property will be taxed on the gift.
Currently, the IRS allows someone to gift up to $13,000 annually without paying any taxes. Let’s say my friend’s house is worth $200,000. Assuming he has given nothing else to his partner during the year he adds his partner to the title, he will be taxed on an $87,000 gift (the gift of $100,000 minus the $13,000 exclusion).
My friend lives in Georgia, which doesn’t recognize gay marriage. However, even if my friend lived in a state where he could legally marry, the IRS would still disallow the unlimited marital deduction. Kelly Erb, a Philadelphia tax attorney who writes a monthly tax column for The Legal Intelligence and edits the popular Taxgirl blog, explains:
The IRS does not follow state law for recognizing same-sex marriages despite the fact that state law determines marital status for federal filing purposes, including the recognition of common law marriages and legal separations. However, DOMA, which defined marriage as “a legal union between one man and one woman as husband and wife” requires that the IRS not recognize same sex marriages.
If my friend were married to an opposite-sex spouse, he could add his spouse to the title with zero tax consequences. Instead, without federal recognition of domestic partnerships, he must weigh the benefits of joint ownership with the crushing tax penalty.
Related posts:
- IRS Losing Gift Tax Valuation Case a Boon for Same Sex Estate Planning
- For First Time Homebuyer’s Credit, Domestic Partners Should Buy New House Instead of Selling Current House to Partner
- Health Care Bill Would Make Domestic Partner Benefits Tax Free
- Same Sex Domestic Partners Qualify for First Time Homebuyer’s Credit Even if One of Them Has Already Owned a House
{ 3 comments… read them below or add one }
My state (Colorado) has beneficiary deeds that help solve some of the gift tax problems problems when a couple is buying a home together. It basically creates a right of survivorship without requiring a joint tenancy (which can have nasty gift and estate tax consequences for non-married joint tenancies). I would usually recommend non married couples buying property together as tenants in common and executing cross beneficiary deeds in favor of each other. This arrangement has the added advantage of discounting in the estate for the first to die, which can make it preferable to Joint Tenancy even if the owners can prove that contributions are equal. This arrangement doesn’t exactly mirror the tax advantages between opposite-sex couples, but can mollify some of the disadvantages of joint property ownership between unmarried persons.
Unfortunately there are still problems when one partner already owns a home, is interested in more than merely avoiding probate, and is unwilling to sell to the other a fractional share. It should be noted that beneficiary deeds are fairly new, and so it is still unclear how these issues will actually work out.
Thanks for the comment, Alex.
As a way to avoid probate, these beneficiary deeds do seem like a good alternative to joint tenancy.
My guess, however, is that many gay couples wish to own property jointly for reasons that have nothing to do with how their property will be disposed upon someone dying. And as you point out, there are still problems when simply trying to take property held by one person and converting it to joint ownership.
It’s true, that often there are grander considerations than estate tax (especially through 2010 when fewer estates, and then none will be subject to estate taxation) or probate avoidance. The situation gets even more complicated when one partner has significantly lower income, and the higher earning partner already supports the other to a significant degree. Though arrangements can be created to approximate benefits and minimize risks, they won’t be perfect. There is sadly just not going to be parity until we see full marriage equality.