There are times in life when family members exchange generous gifts with one another, such as during weddings, estate planning, or celebrations of life. However, while the focus may be on the act of giving or receiving foreign property, it is important to be aware of the tax implications that come along with it. These tax considerations may not be top-of-mind for either the giver or the beneficiary, but they will need to be addressed come tax season.
For an expat, gifting property to a spouse takes a newfound significance when the spouse in question is a foreigner, i.e., not an American citizen or green card holder.
Pro tip: In IRS-speak, a foreign spouse is referred to as a non-resident alien or NRA.
In looking closely at those aforementioned implications, gifting property to a foreign spouse can often be a wise estate-planning move. This is mainly because the gifting of property to a foreign spouse is a clever way of reducing the (very large) tax that typically accompanies property transfers to zero dollars, in many (if not most) cases.
How does gifting property to an NRA spouse work? An example:
Let’s say an expat and US-French dual citizen, Agathe, is married to her Italian husband, Lino. They live in an apartment in Paris’ trendy and eclectic 10th arrondissement. Agathe also owns a beautiful apartment on the third floor of a classic Haussmanian-style building, situated on prime real estate near the Seine River in Paris, France. In theory, Agathe could enjoy a glass of wine in the evenings overlooking the famous river, but it’s impractically large for just herself and Lino, so she doesn’t actually spend all that much time there. She is considering selling.
Agathe gets her home appraised by a premier real estate agency, which values the property at €1,725,000. With the current strength of the US Dollar, that comes to around $1,857,000.
Although Amy inherited the home from her family and does feel a sentimental attachment to the abode, she is getting tired of the financial burden of maintaining the residence. She has considered renting out the property but is wary of the obligation to begin reporting that business to the IRS. Simply put, she isn’t sure what the most tax-advantageous decision is for her.
Which is better: to sell or to gift the inherited apartment?
Actually, Agathe’s case is quite straightforward. To avoid high taxes on a property sale, Agathe should strongly consider gifting the house to her husband instead of selling it.
Tax implications of gifting a house to a foreign spouse
If Agathe decides to give her Italian husband the apartment overlooking the Seine, she generally won’t have to worry about paying taxes because she has not realized any gain from the transfer. However, there are certain details here to pay close attention to.
Since Agathe’s gift is valued at more than $164,000, (the base threshold for gift disclosure to a foreign spouse for 2022), she will still need to disclose the gift by completing a gift tax return known as Form 709. It’s important to note here that this is a complex form to complete correctly and is best done so by an expat tax professional. In Agathe’s case, the lifetime estate/gift tax threshold would need to be applied.
Learn more about US Gift Tax Limits And Form 709
Another note here is that the $164,000 threshold that triggers filing Form 709 applies specifically when gifting a foreign spouse property. Other lower thresholds apply for Form 709 when gifting to other people aside from a spouse.
Annual Gift Tax Exclusion
|Tax Year||Gift Tax Exclusion|
Pro tip: Gifting more than $17,000 of property in 2023 to a non-spouse will require a Form 709.
Looking closely: When is a gift subject to tax?
The IRS does impose a threshold on the total amount of transfers a taxpayer can make before becoming subject to taxation. This threshold is called the lifetime gift and estate tax exemption, and it currently stands at $12.06 million for 2022. In 2023, the threshold will be raised to $12.92 million.
If you gift property in excess of these figures in 2021 or 2022, the IRS will impose a gift tax of a figure between 18% and 40% of the value being gifted.
The gift and estate tax exemption is a provision of the Tax Cuts and Jobs Act (TJCA) that was passed during the Trump Administration in 2018. It will expire as of January 1, 2026, if Congress doesn’t act to make the increased exemptions permanent. If they do not, the exemption will revert back to the previous exemption threshold of $5.49 million (adjusted for inflation).
Read more: US Gift Tax and Form 709
As you can see, gifting property to your foreign spouse opens up a host of questions about the tax implications
These questions may also raise others about gifting and estate tax exemptions more broadly. If you are a US expat in possession of a sizeable estate, you may find it prudent to begin planning well in advance of that potential January 1, 2026 expiration date. Congress may not renew the currently-generous tax-exempt gifting thresholds. Therefore, coordinating with a professional who has their finger on the pulse of these current events (and understands US expat taxes) is critical.
At Bright!Tax, our CPAs specialize in filing expat taxes and strive to file in the most beneficial way for our clients. This is the perfect time to tidy up your estate planning. And our expat expert CPAs can guide you in limiting your taxes and keeping you compliant. If this is something you may want to consider, contact us right away.