Can one gift an apartment to a child outside the U.S. and it not be considered gifted from the IRS perspective?

Question

Background: We live outside the U.S. and file a 1040 each year. We have an apartment outside the U.S. which is slated to be razed and rebuilt over 3-5 years time starting in a few months. (yes, the whole building signed to raze the old building and redo it and not just fix it up. )

We have been renting an apartment for a few years as this has been pending for a while. We finally came to the conclusion that it's better to take a large mortgage despite being middle age and buy something to live in for the next few years, than to rent the current apartment and see the money go to someone else.

In the country where we reside, if one purchases a second apartment, they incur a very large purchase tax on the second (or more) apartment.

We consulted a lawyer in this country and were advised to gift apartment #1 to a child to legally avoid the tax. As long as they recipient owns it for 4 or more years, they can gift it back without any taxes owed.

Question: Given what I write is true and legal, is there any way to approach the IRS to legally be able to avoid paying a gift tax? We really do not want to gift the apartment to a child. This is clearly only being done to avoid paying a purchases tax in the country where we live. No other motive. We really wish to keep ownership of it if we could if it would work out. We'd only gift it to the child with an understanding that we want it back in 4 years or when completed. We have more than one child and we do not wish to favor one over the other buy giving an apartment to them. We also wish to move back into apartment #1 when it's completed. We may not be able to afford the new one and keep apartment #1 and might need to sell #2 at that time. We do not know what will be but this is our current plan.

We are open to gift the child that apartment on condition to gift it back or sign an affidavit saying that the apartment is really ours and we are only doing this to avoid a purchase tax in the country where we reside.

From previous questions I know that there are enough experts on this list to know if there is anything one can do to work this out legally with the IRS. We are looking to this correctly, we're not trying to cheat. We already did our homework in the country where we reside, to our knowledge that country is not being cheated. The tax authority knows about this loophole.

So in short, is there a way one can gift an apartment to a child outside the U.S. and it not be considered gifted from the IRS perspective?

Anyone have ideas?

Answer 1

So in short, is there a way one can gift an apartment to a child outside the U.S. and it not be considered gifted from the IRS perspective?

No.

We are open to gift the child that apartment on condition to gift it back or sign an affidavit saying that the apartment is really ours and we are only doing this to avoid a purchase tax in the country where we reside.

I don't know what quack lawyer you're talking to in your country, but I can't imagine how it wouldn't be fraud and tax evasion based on what you've described. With such an affidavit, you're essentially retaining ownership.

The loophole you're describing is "Well, I gifted the apartment to my kids, so now I don't have any, so no purchase tax for me. Oh, how nice, 4 years passed and my kids decided, entirely on their own, to gift me the apartment!".

But what you're planning is not that. What you're planning is "Well, I 'gifted' the apartment to my kids, so now I don't have any, so no purchase tax for me. But I didn't really gift it, they promised already to gift it back to me in 4 years, and I retained ownership.". Notice the difference? The difference is the fraud you're committing to evade from paying taxes.

Answer 2

I think there is a much better way of doing this. Instead of gifting the apartment you already have, have someone who doesn't own an apartment buy a new one and rent it to you. This can be a child if you like, but also any other person who does not already own an apartment. You lend them the money to make the purchase (or cosign if you were going to borrow to buy) and you sign upfront a contract where you rent the apartment for as long as you want for a rent that is equivalent to the mortgage payments plus any other costs and sell it when you are done. When it is sold you get any profits (or losses), less a small amount to recompense the legal owner for having gone through the trouble.

Answer 3

Given what I write is true and legal, is there any way to approach the IRS to legally be able to avoid paying a gift tax?

The lifetime exclusion to avoid gift tax is currently set at approximately $12M per person. (But in 2026 it might drop down to approximately $6M.) Unless the property, plus other gifts you plan to make in your lifetime exceeds $12M (or possibly $6M), then there is no gift tax due. You simply have to fill out a form with your tax return which states you have reduced your lifetime amount by the amount of the gift (less $16K which you can gift per year before dipping into the lifetime exclusion amount).

If in the future, if your child gifts something to you, the same is true for them.

That's the general answer, but what happens if you gift something to your child, and then your child gifts that thing back to you later (or something of similar value)? This gets a little hairy because it certainly smells like neither transaction was actually a gift, because a gift cannot have strings attached. It sounds like you already confirmed that this "scheme" is legal in the other country, now let's think through the consequences in the US. The IRS is pretty clear about gifts with strings attached not being a gift. Note it's possible for your scenario to happen naturally, but during an audit it's best to assume the auditor is omniscient and could sniff out this sort of game, since it's pretty unlikely compared to it being an agreement. The wrinkle though is that the tax avoidance you achieve is in another country, not the US, so does the IRS even care? The IRS cares about schemes that avoid paying US tax. If you hadn't done the "fake gifts", would the IRS have collected additional tax that you were now able to avoid? If yes, this is illegal. One way to approach this is to assume the mind-reading auditor declares that "Nope. That was not a gift." Then what would they reclassify it as? Maybe ownership never changed hands? In that case would you have paid more tax to the US than you did? Since the answer appears to be no, I'm not sure that the IRS would have a good reason to care.

Ironically, having both you and your child (falsely) reducing your lifetime maximum increases the likelihood of either of you eventually exceeding it, and if either of you ever do, then doing this "scheme" would eventually lead to one of you paying more tax in the future, compared to not gifting back and forth at all. It sure would be funny if one of you did exceed the lifetime max, was audited, and the auditor declared this scheme "not gifts" and as a result you ended up paying less tax because of the audit. (It does happen sometimes...)

Disclaimer: Even if you think the IRS wouldn't ultimately care, I'm not advocating you do this, because filling out an IRS Gift tax form for something you know is not a real gift, means you are lying to the IRS. That in itself may be a crime, even if it may seemingly be harmless. You may want to contact a US accountant, or even the IRS directly (if you can find the correct department to assist) to see what options exist for property transfer back and forth.