Giving your house to your child or children can have tax consequences, but there are ways to accomplish this tax-free.
Q: What is the best method to pass your home to your children tax-free?
A: The best method to use will depend on your individual circumstances and needs.
Q: What is the simplest way?
The simplest way to give your house to your children is to leave it to them in your will. In 2017, as long as the total amount of your estate is under $5.49 million it will not pay estate taxes. In addition, when your children inherit 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 "basis" in property and its selling price. If children inherit property, the property's 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.
Q: What are the downsides to this approach?
There are some downsides to this approach. Some states have smaller estate tax exemptions than the federal exemption, meaning that leaving the property in your estate may cause it to owe state taxes. Also, if you were to need Medicaid at any time before you died, a lien might be put on the property and it might need to be sold after your death to repay Medicaid.
Q: Can I give my house as a gift?
When you give anyone other than your spouse property valued at more than $14,000 ($28,000 per couple) in any one year, you must file a gift tax form. But as of 2017 you can gift a total of $5.49 million over your lifetime without incurring a gift tax. If your residence is worth less than $5.49 million and you give it to your children, you probably won't have to pay any gift taxes, although you will still have to file a gift tax form.
Q: What is the downside of gifting your property?
The downside of gifting property is that it can have capital gains tax consequences for your children, and this tax could be steep if your children plan to sell the home. When property is gifted it does not receive a step-up in basis as it does when it is inherited. When you give away your property, the tax basis (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 law, if you transfer assets within five years before applying for Medicaid, you will be ineligible for Medicaid for a period of time (called a transfer penalty), depending on how much the assets were worth.
Q: Can I sell my home to my children?
You can also sell 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 $14,000 annual gift tax exclusion as well as the $5.49 million lifetime gift tax exemption on this gift. The same issues with gifts discussed above will apply.
Q: Are there any other options for selling my home?
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 $14,000 gift tax exclusion to gift your child $14,000 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 tax problems.
Q: Can I 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.
Q: What is the downside of putting my home in a trust?
The downside is that once the house is in the irrevocable trust, it cannot be taken out again. Although it 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.
Q: What should I do?
Figuring out the best way to pass property to your children will depend on your individual circumstances. Talk to your attorney to decide what method will work best for your family.
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