Technically, the only way that you can always transfer assets, such as a home, tax free is to give them to a spouse. The transfer of property from parent to child has no special consideration. The Internal Revenue Service doesn't make provisions for other tax-free transfers of a home, even if you're giving it to another family member such as your child, parent or cousin. That being said, many home transfers are not subject to tax.
It is possible to transfer ownership of a home to a child without forcing either you or them to pay tax on the exchange. However, gift tax exclusion are only $15,000 per year, or a lifetime limit of $11,180,000.
Ways of Gifting a House to a Child Tax Free
You can gradually gift the ownership of your house to your child tax free; you can also gift up to a certain value in property upon your death without incurring taxes under the estate tax exclusion. Another way to transfer your house tax free to your offspring is to sell it to her. To avoid gift tax or the need to use your exclusion, you'll have to sell it at a fair market price, since a significant discount is considered a gift. If you finance the house for your child, the loan will have to be at or above what the IRS considers to be a fair market interest rate. The IRS' rate is usually competitive relative to what your child will get in the market. Also, while your child will be able to deduct the interest she pays you, you will have to pay tax on the interest.
Transfer Taxes Must Still be Paid
Just because you don't have to pay federal gift taxes when you transfer ownership of your house to your offspring doesn't mean that the transfer will be free of all taxes. You may need to check with your state or county to see if any transfer tax will be due when you record the deed. Some states exclude gifts from taxation. If you sell your house to your child, you are much more likely to have to pay the transfer tax.
2018 Limits for Gifts to Children
As of 2018, you can gift up to $15,000 in property tax free to another person, including your child. If you're married and you file jointly, you are each permitted that $15,000 for a total of $30,000 as a couple. If you make a gift to any one person in excess of $15,000 during 2018, you will need to file a Form 709.
The $15,000 is subject to a lifetime limit of $11,180,000, called the basic exclusion amount. This includes transfers during your life and transfers upon your death. If you exceed that amount cumulatively, you or your estate will owe gift tax. For example, if you transfer deeds to a son worth $1 million per year for 11 years and then die in year 12 leaving him an additional $500,000, the estate will be taxed on the $320,000 excess over the basic exclusion amount.
2017 Limits on Gifts to Children
For the 2017 tax year, you can give up to $14,000 per year, tax free, to your child or anyone else. If you're married, you and your spouse can each give your child $14,000 for a total of $28,000. If your house is worth $280,000, you and your spouse will be able to give it to your child, 10 percent per year, over a 10-year period, tax free. The annual gift exclusion changes periodically, so it's wise to check with the IRS.
As of 2017, you can give up to $5.49 million in gifts ($10.98 million for a married couple) in life or transfers to heirs after death. In other words, you can use your estate tax exclusion to make gifts before you die instead of waiting to pass away. For instance, if you and your spouse want to give your $280,000 house to your child, you could subtract your $28,000 annual gift exclusion, and apply the remaining $252,000 to your gift tax exclusion to let the child take the house tax free. When you die, the $280,000 transfer would be deducted from your exemption.
When you gift your house to your child, you also gift her your basis in it. If you bought your $280,000 house 35 years ago for $35,000, your child inherits the house with a $35,000 basis and may have to pay capital gains tax on it if she later sells it for a profit. If she sells it for a loss, the IRS will calculate the value based on the lesser of your original basis or the fair market value of the property when you gave it to her. This reduces the value of the loss. If your child receives your house after you die, the basis is stepped up to the home's fair market value on the date of your death.
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- IRS: Frequently Asked Questions on Gift Taxes
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Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.