Gift taxes when transacting with family members

An article in SmartMoney suggests filing a gift tax form (form 709) every time you engage in a transaction with a family member that is over $12,000 (the annual gift tax exemption). The problem is presented as follows:

Did you sell a house, a car or that inherited Chippendale secretary to your children this year? If so, you should consider filing Form 709. Why? Because the IRS can claim transactions between you and family members were actually disguised gifts. This can potentially happen whenever you sell a hard-to-value asset, like real estate or stock in the family business, to a relative.

Say you sell your vacation home to an adult child for $275,000 in 2008. In your opinion, the $275,000 price represented the full market value at the time. The IRS may disagree. After you are dead and gone, the Feds could audit your estate's tax return and claim the home was actually worth $375,000. This would amount to a $100,000 gift to your child ($375,000 - $275,000), which could trigger a bigger estate tax bill for your heirs. Or if you make lots of taxable gifts during your life, you could wind up owing a bigger federal gift tax bill before you die.

The solution is to file the gift tax form, even though the vacation home sale wasn't a gift. The article gives more specifics, such as the fact that the IRS only has 3 years to challenge the valuation of the vacation home.

This article led me to read up on gift taxes in instructions to IRS publication 709. I didn't know before that there are medical and educational exclusions to gift taxes. I'll have to read through the IRS tax tip on gift taxes and this other article from SmartMoney when I have some time.