Family member real estate transactions often offer tax and additional financial benefits to both sides. But passing along real estate to a child isn’t always as straightforward as you might think. Whether your intent is to save on taxes, keep the home in the family or make it affordable for a child to buy a home of her own, a number of key factors must be considered. If you don’t, it could end up costing one of you money later on.
Consult with an attorney before agreeing to the terms of sale, recommends Steve McLinden, a real estate adviser for Bankrate.com. An attorney with experience in real estate law can advise you on your options. Some methods for transferring ownership of a home to one of your children are more complicated than others but can have fewer tax implications and offer both parties legal protections.
Consider the implications of a cheaper sale price. If a parent sells a home to a child for less than the fair market value, the IRS will consider the difference between the home’s sale price and fair market value a gift since the buyer won’t be repaying the full amount. Since your child's tax basis in the home will be lower, he may have a taxable gain if he sells the property in the future unless he qualifies for the home sale exclusion, points out Diane Pearson, a financial planner in the Pittsburgh area, in an article for “Financial Advisor Magazine.”
Agree on a down payment amount for less than what a mortgage lender would charge. While a down payment decreases the loan balance your child will owe you, a low down payment allows her to purchase the home with less cash up front.
Finance the sale yourself and sell the home at market value. You can carry a note for the balance of the purchase price and your child’s tax basis will be higher than if you sell the home for below market value. A higher tax basis decreases the chance that he’ll owe the IRS money if he sells the house later and makes money on the deal, especially if it continues to appreciate in value.
Make it legal and put the agreement in writing. Specify in a formal, written note how much the monthly payments will be, the amount of interest on the loan and when the payments are due, “Entrepreneur” advises. Secure the note with the property. That way, if your child defaults on the payments, the home comes back to you.
Charge interest below what a mortgage lender would charge. As long as you have a written agreement proving the loan, your child can claim a deduction for the mortgage interest she pays to you, according to SmartMoney. This helps your child in two ways -- she pays less interest but can still save money at tax time by taking a deduction for the interest she pays.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.