Gift tax in real estate: How it works

If you want to help a family member or friend with a down payment or sell them your property at a discount, the IRS considers this a gift. Under certain circumstances, this makes the transfer of the funds or property subject to gift tax.

Although this article isn’t meant to be personalized tax advice, we’ll review the ins and outs of the gift tax and ways you may be able to avoid it. Speak with a tax professional about your unique situation.

What’s the gift tax?

In theory, the gift tax is paid anytime a gift is given. It’s important to note that you don’t necessarily have to be giving something away. The IRS considers it a gift when something is sold for less than fair market value.

This is important because if you sell a property at a discount to someone, it’s considered a gift of equity. The difference between the purchase price and the appraised value would be taxable.

However, most people aren’t subject to gift taxes because they don’t meet the annual and lifetime gift tax exclusions. Additionally, gifts to spouses who are U.S. citizens may be tax-exempt.

What’s the 2025 gift tax exclusion?

The annual gift tax exclusion for the 2025 tax year is $19,000. This is adjusted periodically to account for inflation. It’s worth noting that you can give up to the annual limit to as many people as you want without reporting the gift. For example, if you have three children you wanted to help buy a home, you could gift $19,000 each in 2025.

How much can you gift tax-free over a lifetime?

The lifetime gift tax exclusion in 2025 is $13.99 million for individuals. Because married couples can pass unused exclusion amounts to the surviving spouse, a married couple can donate up to $27.98 million that is not subject to estate tax.

The Tax Cuts and Jobs Act raised the lifetime gift tax exclusion for 2018 – 2025. If the act expires, the exclusion would revert to $5 million (the equivalent of $10 million for a couple), adjusted yearly for inflation. However, the IRS has said that those who have made significant gifts under the current guidelines won’t be penalized.

How does the gift tax work?

If you make a gift exceeding the annual exclusion limit, it must be reported on Form 709. Any gift you make above that amount counts toward the lifetime exclusion, so the IRS wants to know about it. If you and your spouse make a gift, there’s no joint gift tax form. You would both fill out a Form 709 for that year.

You would pay the gift tax if you have an estate or make gifts that exceed the lifetime exclusion that’s in place when you pass away.

Who pays the real estate gift tax?

In general, the donor pays the gift tax. If the recipient agrees, they can pay the tax under a special arrangement. If you’re considering the latter, consult a tax professional.

How much is the gift tax?

The gift tax rates for 2025 are below. When reading this, it helps to know that the U.S. has a graduated tax system. So, the taxable income builds upon the last bracket until you get to the bracket that applies to your estate tax level. The best way to explain this is with a quick example.

For example, assume you give $40,150 in taxable gifts beyond the lifetime exemption. For the first $10,000 of those gifts, you’re taxed 18%, which comes out to $1,800. Between $10,001 and $20,000, the rate is 20%, which is $2,000. Between $20,001 and $40,000, the tax rate is 22%, or $4,400. The last $150 would be taxed at a 24% tax rate, which is $36. Adding this all up, your total tax liability would come to $8,236.

The IRS makes this all very easy because the equation used to calculate the appropriate amount is always included in the tax table, replicated below:

How to avoid the gift tax for real estate

You can take steps to limit how much gift tax you must pay.

Give the property to a spouse or a dependent

You pay no gift tax on property transferred to spouses who are U.S. citizens. Even if your spouse isn’t a citizen, you only must report total gifts exceeding $185,000 in any given year.

Also, you can give up to the annual exclusion amount to a minor each year. It’s as if they have control of the funds in the present, even if they can’t access them until age 21. This is important because you can’t normally exclude property that someone will only have access to in the future.

Split the gift

You and your spouse can split the gifts. The easiest way to do this is two separate checks. If they are over the annual exclusion limit for both of you, when you file the report, the IRS requests that you both fill out Form 709, but that they be put in the same envelope for paperwork purposes.

Alternatively, your spouse can sign a consent form giving up their right to give a gift so that you can make a bigger gift without having it count toward your estate. For example, with your spouse’s consent, you could gift up to $38,000 ($19,000 x 2) and still not affect your lifetime gift tax exclusion.

Spread gifts out

If you want to give money for a down payment on a home, but you have a few years, you can spread the gift over time to only give up to the annual exclusion limit. This way, you maximize the amount you give without touching your future gift or estate tax liability regarding the lifetime exclusion. For example, you could spread a $50,000 gift over three years by gifting $19,000 in each of the first two year and $12,000 in the third.

Monitor your estate plan

If you want to do this in the most tax-advantageous way, speak with a certified financial planner or tax preparer about life estate planning. They’ll be able to look at your financial situation holistically and minimize your liability while maximizing how much you can give away. For example, transferring property through a life estate can let you give a home to your children now while still living in it, potentially reducing the value of the taxable gift and helping you stay under the lifetime gift tax exemption.

The bottom line: Gift taxes can be costly, but they are avoidable

The donor generally pays gift tax, but they’ll still want to minimize their tax exposure. There’s a lifetime exclusion of $13.99 million per person for the 2025 tax year. Additionally, for gifts up to $19,000, you don’t even have to file a gift tax return, so these don’t count toward the exclusion. You can minimize liability by splitting gifts or spreading them out, among other strategies.

If you want to tap into some of the home equity you’ve built up over the years, learn about refinancing or apply for a home equity loan from Rocket Mortgage^® today.