Many parents late in their lives opt to give their home to a son or daughter rather than selling it. The process of transferring property to a family member as a gift is fairly straightforward, but before making the transfer, savvy parents should check into the income-tax ramifications of giving real estate as a gift, both for the giver and the recipients.
Price the Property
Order a professional appraisal of the real estate you intend to give. By putting an official price on your gift, you are preparing for any questions the Internal Revenue Service might have later regarding the property's value. As of the tax year 2016, the IRS allows an annual gift exclusion of $14,000 per person involved in the transaction. If you and your spouse give property to your daughter and her husband, that amounts to $56,000 – for the four people involved in the exchange – in total value that you can transfer per year without a tax penalty. The value of your real estate probably exceeds this amount.
Consider Your Tax Options
To overcome the tax restrictions, one option is to give the fraction of your property that represents $56,000 each year to your daughter and son-in-law until you equal its appraised value. For example, if your appraisal comes in at $448,000, you can divide your gift by transferring one-eighth of it each year for eight years. You will have to complete a transfer deed each of these years and have the home reappraised each year to be able to assess its accurate value as the real estate market fluctuates. A second option is to wait and let the property transfer via inheritance to your children. A third option is to give the entire property at once and pay the tax penalty.
Consider the Recipient's Plans for the Property
To ensure that your real estate gift will not end up costing your offspring money in taxes, discuss your child's plans for the property. According to federal tax laws, the tax basis of your property when you give it away is the price you paid for it plus the cost of improvements you made. So, even if your house appraises today at $448,000, if you paid $50,000 for it 30 years ago and made $50,000 worth of upgrades, the tax basis of the property you give is $100,000.
If your recipient plans to sell, any sales income above that $100,000 tax basis is fair game for capital-gains tax. To be able to claim a capital-gains exclusion, the recipient must live in the home for two out of the prior five years before selling. If necessary, check with your tax adviser to see how the current capital-gains exclusion amount jives with your child's plans to sell the property.
Fill Out a Transfer Deed
In order to legally transfer your real-estate holding, you must generate a deed that contains a legal description of the property, available from your county assessor, plus the signatures of the givers and the recipients. The most common deed for transfer of property among family members is a quit-claim deed. Because a quit-claim deed contains no implied or guaranteed assurances that the property is free of all liens or encumbrances that might challenge ownership, the element of trust between family members is essential in the transaction. Where you must fill in the conveyance price – what you are charging your offspring for the property – most people fill in “love and affection” or a token amount such as $1.
Read More: How to Fill Out an Interspousal Transfer Deed Form
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I have an MFA degree in Creative Writing and am a published poet who has received several poetry awards. I have established a reputation as an environmental activist, both through the group I co-founded -- see alternativeone.org -- and through a series of op-ed pieces in Montana newspapers. I have written extensively on alternative energy, recycling and endangered species.