Question

This year Drake and his son purchased real estate for an investment. The price of the property was $1,200,000, and the title named Drake and his son as joint tenants with the right of survivorship. Drake provided $900,000 of the purchase price and his son provided the remaining $300,000. What is the amount of the taxable gift?

• $300,000.

  Incorrect

• $600,000.

• $285,000.

• $1,200,000.

• None of the choices are correct - Drake did not make a taxable gift.

Answer 1

The correct answer is $285,000.

Reasoning: The property here is purchased under joint tenancy with the right of survivorship. Under estate law, in case of joint tenancy, two or more persons have co-equal ownership over the property, having equal rights to keep or dispose the property. Further, the right to survivorship provides that if one of the joint tenants dies, the property is automatically transferred to the surviving co-owners. Further, as per IRS rules, transfer of property constitutes a gift, however, gift tax is imposed on the donor with certain exemption (i.e. individuals are allowed to give tax-free gifts upto a certain limit which is presently $15000 in 2019).

Here, Drake and his son are joint tenants to the property, which implies equal ownership in terms of law. So, a property of $1,200,000 would mean $600,000 equity ownership each of Drake and his son, even though they are contributing an unequal amount. Here, Drake's son is contributing $300,000, which means remaining $300,000 portion of his required contribution is a gift from Drake. Further, as per 2019 gift tax exemption, $15000 is allowed as tax-free gift. So, $300,000 (gift from Drake ) less $ 15,000 (exemption allowed) ,i.e.,$285,000 is taxable for donor (i.e.,Drake)