Academic journal article Journal of Accountancy

Creating Joint Ownership: Avoiding the Tax Traps and Other Pitfalls

Academic journal article Journal of Accountancy

Creating Joint Ownership: Avoiding the Tax Traps and Other Pitfalls

Article excerpt


Last month's column showed how adding a child or other nonspouse family member to the title of property as a joint tenant can create unintended consequences of deemed gifting for gift tax purposes. In that illustration, Jack added his daughter, Liz, as joint owner of rental property, immediately triggering a transaction subject to gift tax on Liz's interest in the property.

And if Jack had counted on the transaction to reduce the value of his estate, he'd be doubly disappointed. This is because the entire value of jointly owned property must be included in Jack's gross estate--not the one-half interest that he owns. The only way to get around this would be to prove that Liz contributed her own funds toward the cost basis of the property (see Treas. Reg. [section] 20.2040-1(a)(2) and IRC [section] 2040).

Jack's estate and his family could face a double whammy if Jack lives in a state that sets its own threshold for taxing estates. In Maryland, for example, his estate would be subject to as much as a 16% tax if its overall value exceeds $1 million. In jurisdictions like that, Jack's estate would have to pay an estate tax to the state of residence.


When valuing property and an interest in a business for gift and estate tax reporting purposes, the tax adviser needs to be wary of the tightened roles under the Pension Protection Act of 2006 governing valuations. The IRS has been gearing up to target presumptuous property valuations with penalties not only against tax preparers but against independent appraisers and valuation experts as well.

Let's take a look at what Jack might have to face in his quickfix planning effort and the creation of a joint tenancy with his daughter. At first blush, valuing an investment property for gift tax purposes does not appear to be a big deal. Regardless of which state he lives in, it is clear that Jack needs a timely valuation of the gifted property--a task easily handled by any qualified appraiser. However, when any property is transferred by gift, the valuation expert is required to look at other factors that might have a nexus with fair market value. These factors are described in Revenue Ruling 59-60.

For example, the real estate that Jack owned might have had some business connection affecting its value. …

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