One nearly universal element of the American Dream is the desire for your children to have more and do better than you. Many parents consider the legacy they will leave for their children as a part of their financial goal.
One move you may be considering is giving your house to your children. For many, their residence represents one of their largest investments and a great opportunity to leave wealth to their adult children.
Before you sign over that deed, there are a few important things you should consider:
- Are you over-giving? – A house is a very large gift and can be a significant portion of your assets. Make sure that you are not giving away wealth that will help to sustain you for the balance of your life. Ask yourself - are you in a position to make a gift of this magnitude without adversely affecting your ability to sustain yourself?
- Do you want to remain in the house? – In some cases, this may be your best option. If you leave your house to your heir at your death, their tax basis for the house will be the value at the house at the time of your death. If the value of your house is below the $11.4M gift and exemption amount, you may escape gift and estate tax. There are several ways to achieve this and you should consult with us and/or your estate attorney to discuss the best option.
- What are the tax implications of your gift? – You can gift up to $15K annually per donor, per donee, free of gift tax. As an example, you and your spouse can each give a gift of $15K to your child and their spouse, totaling $60K free from gift tax. You can give up to $11.4M over your lifetime ($22.8M for a married couple) before you are hit with a gift tax.
One thing you should be aware of, however, is when you child sells the house they will be taxed based on the capital gains in the house and their basis will be your acquisition cost for the property.
- Selling below the Fair Market Value may create a problem – If your thought is to sell your house to your child at an incredible discount, you may be creating a problem. The IRS views a sale to a relative that is below market value as a gift rather than a sale. For example, if your house is worth $500K and you sell it for $250K, it would be viewed as a $250K gift. This may not be a problem for you if you are below the $11.4M lifetime gift threshold. Any loss you realize on the transaction will not be deductible, and any gain will be taxed gain (although it may be offset by the $250K ($500K for married couples) home sale gain exclusion. However, your heirs’ tax basis would be based on the sale amount and not the fair market value.
Before gifting your house to your heirs, we recommend you consult with an estate planning specialist. The gift should be a part of a larger estate plan that leaves both you and your heirs in the best possible financial and tax position. Contact us today to set up a free consultation call.