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Let’s Think about Gifts
The Supreme Court back in 1984 held that an interest-free loan is a gift but did not hold that personal use of property is a gift. Also, Congress codified the interest-free loan rules after that Supreme Court decision but did not legislate that the rent-free use of property was also a gift. Those differences may result in misinterpretation of rules, especially those governing use of property, so it’s crucial to understand the unintended gift tax implications that can arise from your generosity.
The IRS assesses a gift tax on “the transfer of property by one individual to another while receiving nothing, or less than full value, in return.” This definition encompasses numerous gifts that may not initially appear to significantly affect your gift tax reporting.
To be clear, simply making a gift does not mean you will owe gift tax. In 2025, each taxpayer has $13.99 million of lifetime exemption available to use during life or at death to transfer assets tax-free to others. This use-or-lose exemption is scheduled to drop on Dec. 31, 2025, to about $7 million, indexed for inflation.
In addition to the lifetime exemption, there is an available gift tax annual exclusion under which gifts of a present interest (meaning the recipient can enjoy it today) worth $19,000 or less per donee in 2025 ($38,000 if splitting gifts with a spouse) do not utilize any of your available lifetime exemption. Knowing how much lifetime exemption you have used during life, intentionally or unintentionally, is critical for estate planning purposes.
By understanding the tax implications of various acts of generosity, you can manage your lifetime exemption and avoid costly surprises.
In general, if you allow someone to use your property for free or for less than its fair market value, a gift may have occurred. Certain familial use of property may not be considered a gift and, generally, allowing someone to use a spare bedroom in your personal residence likely would not be treated as a gift. However, allowing someone to use your commercial property for free likely would be treated as a gift.
For example, if your friend lives in a second residence that you own and pays either no rent or rent significantly below the fair market rental value, you may be treated as making a gift that is equal to the fair market value rent. This could apply to anyone who allows an adult child, sibling or parent to occupy a residence on a rent-free basis, which can become a large gift fairly quickly and trigger a gift tax return filing.
For 2025, the annual gift exclusion is $19,000. If the monthly fair market value rent is greater than about $1,600, then you may need to file a gift tax return to disclose the gift to the lessee and track the use of your lifetime exemption. If any additional gifts were given to the same individual throughout the year, that filing threshold could be reached much sooner.
Relatives Living Rent Free
In 2016, there was an article in Forbes magazine which explained that the AARP calls young adults moving back in with their parents “the new normal.” More young adults in the US are living with their parents than at any time since 1940. Some return home after being on their own for a while, some never left at all.
The author of the Forbes article recommends that it may help to charge a fair market rate of rent, determined by looking at comparable rentals in the area. That determination of fair market rate should be documented in case they are ever audited by the IRS. Ideally, the parents should also formalize the agreement by signing a lease detailing the terms of the agreement including rent amount, when rent is due, and any other rules they want to be followed on their property.
Terminology and types of ownership
Tenancy in common
Two or more unmarried individuals can own real estate as either tenants in common or joint owners. Tenants in common have separate but undivided interests in the whole property. There are no rights of survivorship, and each interest may be conveyed by deed or will without restriction. Tenants are allowed to sell their interest in the property without the consent of the co-owners.
In a tenancy in common, each co-tenant owns an equal share of the property, which means that each co-tenant has an equal right to possess or use the entire property and the rent or maintenance costs of the property are shared among the co-tenants according to their ownership interests. Each co-tenant shares in the value of the property as it appreciates. A co-tenant cannot sell or transfer the other co-tenants’ interests in the property.
Joint tenancy
Joint tenancy is sometimes called “joint tenancy with right of survivorship.” The main advantage of holding property as joint tenants is that it allows property to pass automatically to the survivor when the other owner dies. The property need not pass through a will and avoids probate.
A disadvantage of joint tenancy is shared control of the property, as each joint tenant must consent to any action for the property. A joint tenant loses all interest in the property at death. The deceased person’s interest is automatically transferred to the other joint tenants. There may be tax consequences when one joint tenant dies and the other tenants become owners of the deceased person’s share. Individuals who desire to create a joint tenancy should seek the advice of an attorney to make sure the proper phrasing appears on the deed.
Title vs. deed
Title is distinct from a deed. For real estate purposes, title refers to ownership of the property. A deed is a document that transfers ownership of real estate to another party. A quitclaim deed is used when the ownership of property is transferred without being sold. Unlike a warranty deed, a quitclaim deed does not provide the new owner with any guarantees that the seller owns the property or that the property is free of any liens.
Quitclaim deeds are typically used to transfer property between people who are familiar with one another and who have an established, trusted relationship. Quitclaim deeds may be used to add or remove owners on the title, which can change the tax consequences for the individuals sharing a residence. Tax practitioners should be aware of how their clients own and finance property because these factors may affect the tax consequences.
Home services and costs paid by nonowners
Whenever unmarried adults share a residence, a question may arise whether the services the non-owner performs in the home are in lieu of rent. If the non-owner resident is expected to perform the services as a condition of living in the home, then both the homeowner and the tenant recognize income (rent or compensation) equal to the value of the services or rent received (Regs. Sec. 1.61-2(d)(1); Rev. Rul. 79-24)
The homeowner reports the income on Schedule E, Supplemental Income and Loss, and may be entitled to deduct some home expenses in addition to those expenses allowed regardless of the rental activity (Sec. 212; Regs. Sec. 1.212-1(h)) For example, if the homeowner rents out one room in the home, he or she can deduct an allocated portion of the home costs as rental expenses. If there is no intent to make a profit from the rent, the rental deductions are limited to rental income under the hobby loss rules in Sec. 183. Sec. 280A contains additional restrictions on deductions related to rental of a personal residence that are beyond the scope of this article (See IRS Publication 527, Residential Rental Property.)
In many cases, individuals share a residence with a relative, romantic partner, or friend. In these situations, the service-for-rent exchange may be a gift, which the recipient can exclude from income (Sec. 102(a).)
If it is not a gift, the IRS could view the individuals as being involved in an employee-employer relationship (Sec. 102(c))
The distinction between compensation and a gift is based upon the payer’s intent (McManus, T.C. Memo. 1964-43; Estate of Daly, 3 B.T.A. 1042 (1926))
The transfer is a gift if the transferor makes it because of generosity, love, affection, respect, or similar motives. The burden of proof is on the gift recipient. If the exchange is a gift, there are no income tax consequences, but gift-tax filing obligations may apply if the amounts exceed the annual exclusion.
