907 / When will a gift of a donor’s interest in real estate qualify for the gift tax annual exclusion?

It has been held that the gift of a portion of the donor’s interest in real property, if under the terms of the transfer the donee receives the present unrestricted right to the immediate use, possession, and enjoyment of an ascertainable interest in the property, qualifies for the gift tax annual exclusion.

If a donor transfers a specified portion of real property subject to an “adjustment clause” (i.e., under terms that provide that if the IRS subsequently determines that the value of the specified portion exceeds the amount of the annual exclusion, the portion of property given will be reduced accordingly, or the donee will compensate the donor for the excess), the IRS has ruled the adjustment clause will be disregarded for federal tax purposes.¹

A donor’s gratuitous payment of the monthly amount due on the mortgage on a house owned in joint tenancy by others has been held a present interest gift to the joint tenants in proportion to their ownership interests.²