Planning, Protecting, and Passing It On (Part 2 of 4)
Gifting Property? Why You Need an Appraisal First
This article is the second in a four-part short series created in partnership with John Morabito, an estate attorney who specializes in estate planning and administration and who also serves as a Hearing Partition Officer in the Court of Common Pleas for Philadelphia County. Together, we’ll explore the critical role real estate valuation plays in estate planning, gifting property, estate administration, and resolving ownership disputes. If you’d like to read the first article in this series you can find here.
If you're thinking about gifting your home or another piece of real estate to a child or family member, you're not alone. Gifting real estate during your lifetime is often seen as a generous and strategic move, especially when it’s part of a larger estate plan. But before you transfer ownership, there’s one step that’s frequently overlooked and critically important: getting the property professionally appraised.
As estate attorney John Morabito puts it, “Valuation is essential when gifting or transferring property because of the impact that gifting could have on your federal and state taxes.”
In general, the value of a gifted property is determined by its fair market value (FMV) as of the date the gift is made. According to the IRS, FMV is “the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts”. For real estate, this is ideally supported by a recent arm’s-length transaction prior to the gift. If a recent sale or reliable market data isn’t available, a professional appraisal is the most effective method for establishing FMV. An appraisal includes an analysis of recent comparable sales, along with a clear description of the property’s location, condition, physical features, site characteristics, and relevant market trends, all of which contribute to a well-supported and defensible estimate of value for your estate planner, tax professionals, and the IRS.
What About Realty Transfer Taxes?
In some states and municipalities, there are real estate transfer taxes that apply even when the property is being gifted. These taxes are usually based on the property’s current market value, not what you originally paid. And when questions come up from the taxing authority, online estimates or your best guess won’t be enough. A certified appraisal provides documentation that can stand up to scrutiny. It shows you’ve done your due diligence and helps ensure the process stays transparent and above board. So, if realty transfer taxes apply, they will be based on the most current valuation of the property and not a guess.
Caution: When Gifting, the Transferee Assumes Your Tax Basis
When gifting property, it’s important to note that the transferee will receive the transferor’s original tax basis. This is generally the amount you paid for the property, plus any improvements, and it is used to determine whether you have received any capital gains or losses on a subsequent sale.
Let’s say you bought your home 25 years ago for $150,000 and today it’s worth $600,000. If you gift that property to your child, their cost basis remains at $150,000. If they later sell it for $650,000, they could face capital gains taxes on a $500,000 profit even though they didn’t actually benefit from the original appreciation.
Is Gifting Real Estate Always the Best Move?
It might feel like giving property away during your lifetime is simpler than holding onto it until your passing, but the tax implications can be very different. While transferring property when one passes away allows for a “step-up” in the tax basis (we’ll cover that in Part 3), gifting does not.
That’s not to say gifting is always the wrong move, it depends on your broader goals. That’s why understanding your home’s value, and how it fits into your broader estate plan, is so important before you transfer ownership.
According to Morabito, “Homeowners often have good intentions, but they need to consider the tax implications for the recipient. Understanding the value of the property helps everyone involved make informed, confident decisions.”
Final Thoughts
Gifting a property can be a meaningful act of generosity, but it’s not without tax consequences. A well-documented, professional appraisal can also help avoid confusion, reduce tax risk, and ensure that your intentions translate into a smart financial decision for everyone involved.
Before you move forward with a property gift, take the time to get the facts. A professional valuation is one of the simplest and most effective ways to protect your family’s financial interests.
Need help getting started?
Schedule a certified appraisal today at valiantappraisals.com.
If you’re developing a full estate plan, you can also visit morabitolaw.com for trusted legal support.
Look out for Part 3 of this series in the next week or two, where John and I will dive into how date of death appraisals fit into the estate settlement process.