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U.S. Gift Tax Implications of Quit Claim Deeds for Foreigners

Originally posted on May 31, 2023

U.S. Gift Tax Implications of Quit Claim Deeds for Foreigners

One of many reasons why foreigners take title to U.S. real estate in a foreign entity is related to U.S. estate tax (see our article entitled “U.S. Estate Tax Liability Considerations for Executors and Heirs of Nonresident Estates with U.S. Assets”). An additional tax that warrants consideration is the U.S. gift tax imposed on nonresident aliens.

U.S. title insurance agents, and attorneys, who assist clients by adding or deleting family members, and others, as owners of real estate via quit claim deeds, have U.S. gift tax issues to consider when one of the parties is a nonresident alien.

U.S. Gift Tax Explained

Subject to exceptions, there is U.S. gift tax when a nonresident alien makes a gift of U.S. real estate that is titled under his or her personal name.

Some Examples of Gifts Caused by Quit Claim Deeds

Example 1

In 2011, John and Mary, nonresident aliens of the U.S., and citizens and residents of Canada, jointly purchased U.S. real estate for US $500,000 cash. John and Mary each provided an equal amount of funds for the purchase. There were no subsequent improvements.  In 2020 when the property was valued at US $600,000, John and Mary asked ABC Title Co in the U.S. to add their son, Harry, to the deed. Harry did not compensate John or Mary for the transaction. ABC Title Co prepared and recorded a quit claim deed adding Harry, as joint owner with right of survivorship, and with John and Mary continuing as tenancy by the entirety, on the new deed.

The Gift and the Tax Liability

Since Harry did not provide any compensation to John and Mary, the new deed resulted in a U.S. taxable gift of US $200,000 to Harry. (Harry was given 1/3 ownership of property valued at US $600,000).

Assuming there were no other tax factors involved, the U.S. gift tax on this real estate gift of US $200,000 to Harry, by John and Mary in 2019, was US $39,200.  John and Mary had the obligation to pay the gift tax.

If it was not timely paid, penalties and interest would also apply.  Also, if John and Mary do not pay the tax, a special 10-year IRS gift tax lien attaches to the property,[1] which may hinder a future sale of the property to a knowledgeable buyer. Also, Harry becomes personally liable for the gift tax, to the extent of the value of the gift.[2]

Note that similar tax issues would apply if John and Mary originally decided to give 100% of the property to Harry, instead of adding him to the deed.

Example 2

Let’s continue with the same facts as Example 1, except, in 2023, at a time when the U.S.  gift tax has not yet been paid, John, Mary, and Harry, sell the real estate to Steve, an unrelated individual.

The Lien on the Property  

Recall that a special 10-year IRS gift tax lien exists on the property. Just as the special 10-year IRS estate tax lien imposed under code section 6324(a)(1) is not divested on the sale to a bona fide buyer,[3] the existing special 10-year IRS gift tax lien on the property imposed under code section 6324(b), may not be divested on a sale to a bona fide buyer. Thus, Steve may wish to require an IRS release of lien before concluding the purchase transaction.

Example 3

Consider the same facts as Example 1, except only John contributed funds for the purchase of the real estate. Mary did not contribute any funds, although she became a 50% owner according to the deed.

The Issue 

When U.S. real estate is purchased jointly by nonresident aliens, the general rule is that a U.S. taxable gift occurs, to the extent the joint owners contribute a disproportionate amount of funds to the purchase of the property.[4]

However, a special rule applies to nonresident alien spouses who (after 1988) purchase U.S. real estate jointly with right of survivorship, (i.e. tenancy by the entirety).  In this case, there is no U.S. taxable gift at the time of purchase,[5] because each spouse’s interest is not unilaterally severable (e.g. there is no completed gift).

Instead, in this case, a taxable gift occurs if the proceeds of termination of the joint ownership are dispersed to the spouses disproportionately to the amount contributed by each spouse toward the cost of the property.[6]

A different result occurs if nonresident alien spouses purchase U.S. real estate jointly as “tenants in common”.  In that case, because there is a completed gift at the time of purchase, a U.S. taxable gift arises at the time of purchase if the spouses contribute a disproportionate amount of the purchase price compared with their respective ownership interests.

Some Exceptions and Limitations to the U.S. Gift Tax Rules for Nonresident Aliens

Generally, there is an annual inflation-adjusted exemption for gifts to any recipient. For 2023, the exemption is US $17,000.

Separate Exemptions Where Donee is the Spouse

  • If the donee spouse is a U.S. citizen, the exemption is generally unlimited.
  • If the donee spouse is a nonresident alien, there is an annual inflation adjusted exemption. For 2023 the exemption is US $175,000.

Special Rule for Nonresident Alien Spousal Joint Purchase of Real Estate

When nonresident aliens jointly purchase U.S. real estate (as joint ownership with right of survivorship, or as tenants in common), U.S. gift tax applies to the extent the owners contribute disproportionately to the purchase price.  However, as explained above, if the owners are nonresident alien spouses, there is no taxable gift at the time of the joint purchase, provided the ownership is recorded as a tenancy by the entirety.[7] Instead, a taxable gift is generally triggered at the time of termination of the joint ownership, to the extent the proceeds thereof are distributed to the spouses disproportionately, compared with their relative contributions to the cost of the property.[8]

Tax Treaty Exemptions

If there is an estate and gift tax treaty between the U.S. and the recipient’s (donee’s) home country it may reduce, or eliminate, the U.S. gift tax, or reduce or eliminate any double tax. For example, the U.S./Germany Estate and Gift Tax Treaty provides a potential 50% marital deduction for gifts of U.S. real estate to a German spouse.[9] The U.S./Austria Estate and Gift Tax Treaty exempts from Austrian tax, gifts of U.S. real estate that are otherwise taxable in Austria, provided the gift is taxable in the U.S.[10] The estate and gift tax treaty with France contains a provision that potentially excludes from U.S. gift tax, a portion of U.S. real estate gifts to a spouse.[11] See also the rules for exemptions for spousal real estate gifts in the estate and gift tax treaty with the United Kingdom.[12] Other treaty examples exist, although there is no U.S. gift tax treaty with Canada.

[1] IRC 6324(b)
[2] IRC 6324(b)
[3] CCA 200929037
[4] Treasury Reg. §25.2511-1(h)(5)
[5] Treasury Reg. §25.2523(i)-2(b)(1)
[6] Treasury Reg. §25.2515-1(d)
[7] Treasury Reg. §25.2523(i)-2(b)(1)
[8] Treasury Reg. §25.2515-1(d)
[9] U.S./Germany Estate and Gift Tax Treaty Article 10(4)
[10] U.S./Austria Estate and Gift Tax Treaty Article 9(5)
[11] U.S./France Estate and Gift Tax Treaty Article 11(2)
[12] U.S./U.K. Estate and Gift Tax Treaty Article 8(2)