How Do I Transfer Property to a Family Member Tax-Free?

One person handing a miniature model of a house to another person.A parent may want to gift a house to their child for several reasons. One of the main reasons is to provide financial support and security for their child's future. By transferring ownership of a property, parents can help their child avoid the burden of a mortgage or rent payments, allowing them to save money and build equity in a home.

Additionally, gifting a house can also be a way for parents to pass on their wealth and assets to the next generation, ensuring that their child has a stable foundation for their own financial future. Furthermore, transferring property to a family member can also be a way to strengthen family ties and create a sense of unity and support within the family.

Overall, gifting a house to a child can be a generous and meaningful way for parents to provide for their loved ones and secure their legacy for generations to come.

Giving your house to a loved one, such as your child, can have potential tax implications. However, there are several ways to accomplish it tax-free.

The best method to use will depend on your individual circumstances and needs. Here are four potential options you may want to consider:

1. Leave the House in Your Will

The simplest way to give your house to your children is to leave it to them in your will. As long as the total amount of your estate is under $13.61 million (in 2024), your estate will not pay estate taxes.

In addition, when your children inherit real estate property, it reduces the amount of capital gains taxes they will have to pay if they sell the property. Capital gains taxes are paid on the difference between the property's basis and its selling price. If children inherit property, the tax basis is stepped up, which means the basis would be the value of the property at the time of death, not the original cost of the property.

Some downsides to this plan include the following:

  • Some states have a smaller estate tax exemption than the federal exemption, so leaving the property in your estate may cause your estate to owe the state taxes.
  • Also, if you were to need Medicaid at any time before you died, Medicaid might put a lien on the property, and the property might need to be sold after your death to repay Medicaid.

2. Gift the House

When you give anyone other than your spouse property valued at more than $18,000 ($36,000 per couple) in any one year, you have to file a gift tax form. But you can gift a total of $13.61 million (in 2024) over your lifetime without incurring a gift tax. If your residence is worth less than $13.61 million and you give it to your children, you probably will have to pay any gift taxes. (Note that you will still have to file a gift tax form.)

The downside of gifting property is that it can have capital gains tax consequences for your children. If your children are planning to sell the home, they will likely face steep capital gains taxes. When transferring real estate as a gift, it does not receive a step-up in basis, as it does when it has been inherited. When you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient.

In addition, gifting a house to your children can have consequences if you apply for Medicaid within five years of the gift. Under federal Medicaid law, if you transfer assets within five years before applying for Medicaid, you will not be eligible for Medicaid for a certain period, depending on how much the assets were worth (called a transfer penalty).

3. Sell Your Home

You may consider the option of selling your house to your children. If you sell the house for less than fair market value, the difference in price between the full market value and the sale price will be considered a gift. As discussed above, you can use the $18,000 annual gift tax exclusion as well as the $13.61 million (in 2024) lifetime gift tax exemption on this gift. The same issues with gifts discussed above will apply to this gift.

Another option is to sell the house at full market value but hold a note on the property. The note should be in writing and include interest. You can then use the annual $18,000 gift tax exclusion to gift your child $18,000 each year to help make the payments on the note. This can be tricky, and you should consult with your attorney to make sure this won't cause any tax problems.

4. Put the House in a Trust

Another method of transferring property is to put it into a trust. If you put it in an irrevocable trust that names your children as beneficiaries, it will no longer be a part of your estate when you die, so your estate will not pay any estate taxes on the transfer. The house will also not be subject to Medicaid estate recovery.

The downside is that once the house is in the irrevocable trust, it can't be taken out again. Although the house can be sold, the proceeds must remain in the trust. Similar to making a gift, if you apply for Medicaid within five years of transferring the house, you may be subject to a Medicaid penalty period.

Additional Support and Resources When Transferring Ownership of Property From Parent to Child

Figuring out the best way to pass property to your children will depend on your individual circumstances. Be sure to talk to a qualified estate planning attorney in your area. They can help you decide what method will work best for your family's situation.

To learn more about this topic, check out the following articles:

Contact us

Questions? Contact us at ELA/ASNP

| Providence , RI