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Transferring Title

The tax liability for income earned through personal services (wages, salary, profits from a business owned and managed by you) cannot be shifted by assigning the income before you receive it. Income from property, however, belongs to the owner(s) of the property. Therefore, transferring title to the timberland or timber itself before a timber sale is held spreads the tax liability among the individual owners. This only makes sense if those receiving interest in the property are the intended beneficiaries of the income from the property. Several precautions should be noted.

The transfer must include the technical transfer of legal title. In addition it must be a complete transfer of all ownership rights, including practical control of the management, use, and disposition of the property. This means that in most circumstances the individuals receiving the property should not be minors. Guardianship or trust arrangements are generally required for transfers to minors.

A transfer at less than fair market value constitutes a gift. The amount of the gift is the difference between the sale price and the fair market value of the interest transferred. The gift tax liability can be avoided in some cases by taking advantage of the $11,000 annual gift tax exclusions. The annual gift tax exclusion provides that a donor can make annual gifts of no more than $11,000 to any number of recipients without incurring a gift tax liability. In addition, a husband and wife, with mutual consent, can elect to have any gifts made treated as made one-half by each. This election allows you and your spouse to make annual gifts of $22,000 to any number of recipients without incurring a gift tax liability. Even if the annual exclusion is exceeded no gift tax is due until the unified credit is used up.

Partnership not necessarily created - The mere joint ownership of property does not create a partnership. A partnership exists for tax purposes only if the joint owners are carrying on a trade or business for the production of income. If the activity is simply an investment each person would report their proportionate share of all incomes and expenses from the property as if they owned it individually. They may want, however, to implement a partnership agreement to formalize the relationship of the people managing the property. It may be helpful to designate a "managing partner." This is especially useful in business dealings, avoiding the necessity of getting everyone involved in the day-to-day affairs.

Whether or not Form 1065, partnership tax form, is filed with the IRS, for all practical purposes the information required to complete this form is needed to provide the joint owners with the information needed to report transaction on their individual Form 1040's