Final answer:
The correct answer is False. It is false that a person can avoid a gift tax by selling property to a relative at a low cost. The IRS considers the difference between the fair market value and the sale price as potentially subject to the gift tax. The estate and gift tax affects only the transfer of wealth exceeding the exemption threshold, which was $12.06 million in 2022.
Step-by-step explanation:
To address the student's question: it is false that a person can avoid a gift tax by selling property to a relative at a very low cost. The Internal Revenue Service (IRS) has rules in place to prevent the circumvention of the gift tax in such a manner. When an individual sells an item for significantly less than its fair market value (FMV), the IRS can determine that the transaction includes a gift component. Thus, the difference between the FMV and the actual sales price can be subject to the gift tax.
The estate and gift tax is a tax on the transfer of wealth, which includes money or property gifted or bequeathed to another person. In 2022, the lifetime exemption for estate and gift taxes was set to $12.06 million, which means that only the value of estates or aggregate of gifts exceeding this amount would be taxable at the federal level. This exemption applies to a tiny percentage of the population due to the high threshold.
It is important to note that selling property to a family member at a low cost could potentially have other tax implications as well. For example, if the property is not sold at an arm's length transaction, which is a deal conducted between two parties freely and independently of each other, there may be additional taxes or consequences. In summary, transferring property by selling at a low cost does not automatically exclude the transfer from the gift tax.