Gift tax for Non Resident Spouse

Here is the situation

Each non resident spouse has been reporting half the rental income, on a joint owned US property, on separate 1040NRs.

Right before the house is sold, Spouse A does a No Consideration deed transfer of the property to Spouse B.

1. Does Spouse A file a gift tax return as 1/2 the value of the rental property is over the $155,000 annual exclusion, and pay gift tax on the excess?
And Spouse B report the whole gain on their 1040NR.



2. Or can each Spouse report half the sale gain on their individual 1040NR returns, as if the deed transfer did not happen.

Needless to say, FIRPTA was not withheld at settlement.


As always, any insight is appreciated.

How'd they get out of FIRPTA withholding I wonder?

Who knows, seems like an oversight, though I have seen this happen in the past.

No clear where $155,000 is from if they are both NRAs? Go back to the beginning on this one. Look at local law (eg is this community property), who provided the consideration on purchase, did both spouses file timely net elections etc. Why was the gift made? Was it for home country tax savings? Whilst substance over form might be an attractive argument, if the home country is getting one set of reporting I wouldn't like to present an inconsistent story to the IRS.

I suspect a large chunk of gift tax is due on a 706-NA.

Thanks again for a deeper dive into the situation.

I am not clear if the annual exclusion applies to this situation as they both are non residents, and only applies if the gift is from a US citizen to a non resident spouse? Does Spouse A file a gift tax return as 1/2 the value of the rental property is over the $155,000 annual exclusion, and pay gift tax on the excess

This is is not in a community property state.

Each spouse provided consideration for the purchase.

I suspect the thought of the gift was made to not have FIRPTA withholding, though I feel FIRPTA still should have been held upon closing as the receiving spouse is a non resident, and therefore making the deed transfer of no benefit on the overall sale had FIRPTA been withheld.

Each spouse filed the net election on the first filed tax return for the rental.

No tax savings in home country as each spouse is not filing a return in their home country.

Is the 706-NA for a decedent?

IRC Sec 2523(i)(2) which refers to Reg Sec. 25.253(i)-1(c)(2)

The $100,000 annual exclusion for gifts to a noncitizen spouse is available regardless of the status of the donor. Accordingly, it is immaterial whether the donor is a citizen, resident or a nonresident not a citizen of the United States, as long as the spouse of the donor is not a citizen of the United States at the time of the gift and the conditions for allowance of the increased annual exclusion have been satisfied. See §25.2503-2(f).