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Believe it or not, it wasn’t all that long ago that it was possible to transfer property from parents to children (through each generation) without having to worry at all about the IRS or tax implications.
Today, however, nothing could be further from the truth!
Luckily though, the hoops that have to be jumped through to gift a piece of property or real estate to children without hammering them with an oversized tax burden are relatively simple and straightforward to navigate.
Especially if you’re working with a qualified attorney or CPA (important disclaimer – I’m neither, just a real estate agent) that understands the ins and outs of this kind of transfer.
Below, though, you’ll learn a couple of the different strategies available to help ease this process along as much as you can. Different solutions will work for different people in different situations, but hopefully this guide shines a bit of light on the topic for you moving forward.
Let’s jump right it, shall we?
Hold Your Property (Forever)
Unsurprisingly, the simple strategy of holding your property in your name forever (or at least until you pass away) and then giving it to your family members is the easiest means of transfer of them all.
Your estate will have to fit below what’s called the “unified federal estate gift and estate tax exemption” figure, which was $11.4 million in 2019, but as long as it slides underneath that limit the process is pretty straightforward.
Any heirs that receive other property will not have to worry about getting hammered with capital gains taxes (no capital gains on the appreciation of the value, either), but more importantly your heirs won’t be responsible for having to cover any federal estate tax, either.
If this is a scenario that makes sense for you, your family, and your estate planning it’s probably the best way to maneuver this specific situation.
Outright Gifting of Real Estate to Children
If, on the other hand, you’re looking to give a gift of property and real estate to your children outright – without living in that home or living on that property – this transfer of ownership may involve some tax implications, but they can be navigated and minimized, too.
It will be necessary to “dip into” the unified federal gift and estate tax exemptions that we highlighted above to go through this process.
First by offsetting the amount of the gift by using a $15,000 annual gift tax exclusion ($15,000 exclusion per recipient, which can double if you give the property to a child and their spouse).
You can double that annual gift tax exclusion again by having your spouse gift the same value to a child and their spouse, basically turning that $15,000 a year gift into a $60,000 a year gift without raising any eyebrows at the IRS!
With this approach your child may be on the hook for more significant capital gains taxes if they sell the property later down the line, something that want to be apprised of ahead of time for sure.
Secondly, you’ll want to know that you have dipped into the permanent unified federal gift and estate tax exemption that will dictate how your estate is managed the time of your passing.
Sell at a Bargain Price
If you ended up selling a piece of property at an unbelievably discounted price (below what the IRS might consider Fair Market Value) to a complete and total stranger you have no problems whatsoever with the taxman. They would just figure you made a bit of a bad deal.
If, on the other hand, you offered to sell a property to a relative at a figure below Fair Market Value – significantly below Fair Market Value – little alarm bells are going to go off.
A lot of people learn the impression that they can sell the home they want to transfer to their children for one dollar (something else relatively trivial) without getting into any trouble with the IRS.
And while that’s true – it is your property and you can sell it on any cost basis you want – the IRS is going to consider this transfer of ownership differently.
They will take into account the amount of money that you sold the property to your family for (one dollar in our example), calculate the Fair Market Value of that property, and then subtract the sale price from that figure to find out how much of a gift was made.
If you were to sell your family members a piece of property worth $500,000 for a single dollar, the gift figure would be coming in at $499,999. That would be deducted from your unified federal gift and estate tax exemption (less the $15,000 annual gift exclusion mentioned above).
Full Price Sale with Seller Financing
A strategy to get around the headaches created by selling a property to loved ones for a dollar is to simply sell the property at “full price” (or Fair Market Value) while offering seller financing.
Come up with an amount of money that your child can afford (say $50,000 down) and then carry a note for the balance. Let’s use that same $500,000 house we highlighted above. Now the amount of money being financed by the seller is $450,000.
Come up with a monthly payment number that your child won’t have any trouble making and then charge interest (the applicable federal rate) – almost always below average commercial mortgage rates – that fit inside that monthly payment.
Have this all drawn up by lawyers and CPAs, get it down in writing, and then make sure that your child cuts a check each month to cover this bill. From there you can gift up to $15,000 a year with no tax implications, writing separate checks for the mortgage amount while still keeping everything clear and aboveboard.
Tax implications for you and your children are going to be a little bit interesting with this strategy (something you’ll certainly want to run past a CPA that specializes in real estate deals of this nature) but it’s a great way to minimize the financial impact of moving a piece of property to someone that you love.
Can You Gift a House and Still Live There?
Things get a little bit sticky with the IRS when a piece of property is transferred to someone else but the original owners continue to live there.
The fair market value/full price seller financed approach we mentioned above is a great way to get around this strategy, with the original owner essentially “renting back” the property to make sure that any money transferred ends up back in the original bank accounts.
Just make sure that these transactions are kept separate or you’re going to have the IRS poking around in your financial business.
It might not be a bad idea looking into setting up a qualified personal residence trust if the seller financed full market value approach doesn’t make sense for you and your children right now. Again, that’s something a lawyer and to a CPA can better help you with.
FAQ
Can I Sell My House to My Child for $1?
As mentioned earlier, you can in fact sell the home you own to a child for one dollar – but things get a little bit tricky when it comes to estate taxes and capital gains taxes for your child later down the line.
How Do I Sign My House Over to My Child?
Seller financing approaches, holding a property until your passing, or qualified personal residence trust setups are the best approach for signing a house over to a child.
How Do I Sell My House to My Child?
There are multiple strategies you can use to sell your home to your child, but of them all selling the property at fair market value (FMV) with seller financing and then gifting back money they pay as a (using the $15,000 annual tax exempt gift strategy) is the smartest approach.
Is It Better to Gift or Inherit a House?
Inheriting a house usually has the fewest amount of tax implications, especially when it comes to capital gains taxes. If making the transfer of ownership as tax free as possible is of the utmost importance, that’s the way to go.
How Do I Avoid Capital Gains Tax on Gifted Property?
Having your child inherit a property is the easiest way to avoid estate taxes as well as capital gains taxes. You’ll have to live in the house (at least part-time) until your passing to do this effectively, but it minimizes tax implications as much as possible.
