Important takeouts:
Annual Gift Tax Exclusion: $19,000 per person in 2025 ($38,000 for couples). Lifetime Gifts and Real Estate Tax Exemption: It was $13.99 million in 2025, but is expected to decline in 2026. Advantages of inheritance: A step-up base often saves heirs from a significant capital gains tax. Trusts and Spouse Transfer: An effective tool for transferring property when dealing with larger real estate or married couples.
Giving property to a loved one can feel like a generous way to communicate wealth, but the strict regulations and tax consequences of doing so are often overlooked. There are several strategies to avoid gift tax on property, but each comes with trade-offs that can have lasting financial implications.
This Redfin Real Estate Guide explores strategies that exist to minimize tax liability. So, whether you want to transfer ownership of your Birmingham, Alabama home to your spouse or move your Miami, Florida villa to your kids, keep reading to find the best path for you and you.
What is Gift Tax?
Gift tax is a federal tax that applies to remittances from one person to another without receiving equal value in return. Unlike income tax, it is paid by the donor rather than the recipient.
Who applies: US citizens and residents who transfer assets beyond the annual or lifetime exemption threshold. If that applies: Only if the gift exceeds the annual exemption amount or if the lifetime transfer exceeds the federal property tax exemption. Important gifts: real estate, cash, cars, jewelry, stocks, even loan tolerance.
When evaluating gift tax, it is important to know the rules and regulations regarding annual and lifetime gift exemptions. This ensures that you submit taxes appropriately and give gifts in the most advantageous way to both you and the recipient of your gift.
Annual gift tax exclusion
Every year, the IRS allows individuals to pay taxes and give away a set amount per recipient without having to file a gift tax return. The 2024 exclusion is set at $18,000 per recipient, and will rise to $19,000 in 2025. If you are married, you and your spouse can combine exclusions and give recipients of $38,000 per year in 2025.
This means that you can give up the exclusion limit without counting the per capita exclusion limit towards a lifetime exemption. This method works best when you have low value characteristics or are willing to gradually transfer ownership over time. However, for high value traits, spreading gifts over several years may be unrealistic.
Lifetime gifts and real estate tax exemption
Beyond the annual exclusions, lifetime gifts and real estate tax exemptions are provided. Here’s what you need to know:
The exemption for 2025 is set at $13.99 million per individual and $27.98 million for married couples. If you are giving property worth more than the annual limit, you must file an IRS Form 709, and any excess amounts will be deducted from the total lifetime exemption. The exemption is expected to drop significantly in 2026 if the 2017 Tax Reduction and Employment Act provisions expire.
Understanding lifelong gifts and real estate tax exemptions is important when deciding whether to give a gift or wait. Using exemptions reduces what remains to protect your property from federal property taxes.
Six ways to avoid gift tax on property
1. Give a portion of the value of your property over several years
One effective strategy is to transfer some of the value of a property over a series of years, while remaining within the annual exclusion limit. For example, in 2025, you could transfer up to $19,000 worth of property to recipients without tax impact. If you are married, this amount will double to $38,000.
Disadvantages:
This strategy works well with properties with modest value, but it can take decades to fully transfer ownership, making it less feasible when dealing with expensive homes and commercial properties.
2. Split gifts between spouses
Another way is to have a gift split between spouses. This allows one spouse to give gifts on both sides, effectively double the amount given tax-free in a year.
To utilize this provision, both spouses must agree and submit appropriate documents to the IRS. This technique is especially useful for couples who want to accelerate their gifting process without exhausting their lifetime exemption early.
3. Use lifetime gifts and real estate tax exemptions
For larger transfers, lifetime exemptions can be used. For example, if you want to transfer $500,000 worth of property to your child in 2025, report the gift to the IRS. Immediate taxes are not outstanding, but the full value is deducted from the $13.99 million lifetime exemption.
Disadvantages:
This reduces the protection that other assets are available, and could lead to real estate tax exposure later.
4. Have the recipient inherit the property
Another consideration is whether the gift property is the right decision. From a tax perspective, it is almost always better for the recipient to inherit the property rather than accept it as a gift. Once a person inherits a property, its cost base has risen to fair market value at the time of the death of the original owner. This means that if you purchased a house for $100,000 decades ago and are worth $500,000 at the time of death, your heir’s basis will be reset to $500,000. If you then sell the inherited home for the same price, you will have little responsibility for capital gains.
Instead of gift drawbacks:
If you give the facility to your lifetime instead, the recipient will inherit your original cost-based $100,000. If you sell it later for $500,000, Capital Gain is borrowing taxes on a difference of $400,000. This shows why inheritance is often a more tax-efficient option.
5. Transfer the property to an irrevocable trust
For individuals with larger real estate, transferring property to irrevocable trust is also an effective solution. Once the property is placed in a trust, it will no longer be considered part of the property for tax purposes. This can help you avoid real estate taxes and even protect your property from Medicaid property collection. However, the main drawback of this strategy is its irrevocable.
Disadvantages:
Once the property is placed in a trust, it cannot be retrieved, sold or used as collateral for a loan. You must ensure that you are comfortable giving up control forever.
6. Give property to your spouse
Another tax-efficient strategy is to give property to your spouse. Under US tax law, gifts between citizen spouses are unlimited and do not cause gift tax filing requirements. This means that you can transfer assets of any value to your spouse without worrying about taxes. However, it is important to note that special rules and restrictions apply if your spouse is not a US citizen.
Important Non-Tax Considerations
While avoiding gift taxes may sound attractive, it is important to weigh potential outcomes beyond the tax impact of property transfers.
Loss of control: Giving property will no longer be able to own it. This means that if your financial situation changes the Medicaid “lookback” period, you will not be able to sell, oppose the shares, borrow or reclaim the shares. This could result in a much larger tax bill than if the property had been inherited instead.
Summary: What you need to know about gift tax on property
To avoid gift tax on property, both annual exemptions and lifetime exemptions must be carefully planned and understood. Strategies such as splitting up gifts with spouses, using trust, and relying on unlimited marital deductions are useful, but it is important to weigh the shortcomings.
In many cases, inherited property remains the most tax-efficient way to transfer property. However, because every situation is unique, we recommend consulting with a certified financial planner or tax advisor before making a decision.
