It is possible to transfer a property to a child. However, the transfer of property from parent to child without receiving a tax hit is a different matter altogether. So, when giving a property to a child or taking ownership of a patents house, you first need to consider how the IRS will view the process.
Tax-Free House Transfers
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. For example, 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 is only $15,000 per person for the tax year 2021. However, there is also a lifetime limit of $11.7 million in 2021.
Transferring Ownership of Property From Parent to 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 house to a child tax free is to sell it to them. 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 real estate transfer tax.
2021 Limits for Gifts to Children
As of 2021, 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 2021, you will need to file a Form 709.
The $15,000 is subject to a lifetime limit of $11.7 million for 2021, 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 $900,000, the estate will be taxed on the $200,000 excess over the basic exclusion amount.
When you gift your house to your child, you also gift your basis in it to them. 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 they later sell it for a profit. If the child 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.
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.