Foreign Nationals and U.S. Gift Tax Consequences of Executing Certain Real Property Deeds

There are many ways in which foreign nationals can hold title to U.S. real estate. Title may be held through various entities (i.e., corporations, partnerships, limited liability companies, trusts) or can be held in an individual’s personal name or held jointly with others. Each form of ownership is subject to specific rules of U.S. income and estate taxation.

There are times when the foreign national may wish to change the way title to the U.S. real estate is held. Depending on the type of the change, the transaction may result in unintended U.S. gift tax consequences.

One of the most common situations involves property initially taken title by a husband and wife. At some time after initial title is taken, they decide to gratuitously add the names of their adult son and daughter to title, without first obtaining advice on the U.S. gift tax consequences of doing so. Husband and wife execute a deed to show that husband, wife and two adult children all now have title to the U.S. real estate. Since the children did not pay any consideration to the parents, husband and wife have made a gift of U.S. real estate to their children and may now be subject to U.S. gift tax on the transaction.

The amount of the gift will depend on how title is conveyed. If the title is conveyed by the husband and wife to the husband and wife and two adult children as joint owners, with rights of survivorship, and any of the parties, acting alone, may defeat those rights by severing his or her interest, 50% of the fair market value of the property at the time of the transfer is considered to be the value of the gift to the adult children for federal gift tax purposes. If none of the parties alone can defeat the joint interests of the parties, the value of the gift must be determined actuarially.

The husband and wife would each be able to reduce the amount of the taxable gift to each of the children by the gift tax exclusion of $16,000 per person per year. Gift tax would be due on gifts exceeding the $16,000 exclusion amount. The gift tax rates start at 18% and increase to a maximum rate of 40%.

To make the situation even worse, foreign nationals are often under the mistaken belief that by adding the names of their children to the title of the property, it will reduce the amount of U.S. estate tax that could be due on death. Since the children obtained their interest in the property by gift, the full value of the property could still be includible in the estate of the husband and/or wife, if they should die while still owning the property.

Unfortunately, once the deed has been executed, it cannot be “undone” by simply having the children deed the property back to the parents. This would result in the children making a gift to the parents, which would subject the children to U.S. gift tax on the title transfer back to the parents.

There are instances where the execution of deeds does not result in U.S. gift tax consequences. For example, the foreign national could have taken title to the U.S. property in his or her sole name. At some later time, he or she could wish to add the spouse to the title of the U.S. property. If this resulted in title being held as tenancy by the entireties, the U.S. gift tax would not apply at the time the tenancy was created, even if the spouse did not contribute any funds in exchange for the interest in the property. The U.S. gift tax could apply at the termination of the tenancy (i.e., sale of the property) other than by death of a spouse.
Foreign nationals should consult with a U.S. tax advisor familiar with their specific circumstances to determine the U.S. gift tax consequences of gratuitously adding or removing names to title of U.S. real estate before executing the deed.