For many reasons, giving your child your house comes with tax implications. Your child may very well accept your turn-key or fixer-upper home with open arms. And you may gladly give it to him or her. The IRS says giving or transferring a property of any kind is subject to a gift tax if it exceeds the annual exclusion amount.
Gift Tax Defined
If a property is transferred or given to someone, in this case to your child, for nothing or less than full value, a gift tax is levied. The donor is responsible for the gift tax, but it may be split with the donee. A gift tax is applied if the value of your home exceeds the annual exclusion amount established by the IRS. More than likely, your house exceeds the annual exclusion amount; check IRS publication 950 for current annual exclusion amounts.
How to File?
Still want to give your house to your child? Great! The IRS says Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, is required in addition to your standard return due in April of each year. Transfer documentation and a home appraisal must accompany Form 709. Consult your tax professional for further guidance.
Thinking It Through
Despite your generosity, you cannot deduct any portion of the gift tax. Thankfully, your child will not pay a tax upon receipt of your house. However, once your home is transferred, your child is responsible for county real estate taxes. If the home is owned free and clear, semi-annual payments to the county assessor’s office are required. If the home is financed, ensure the bank is withholding monthly real estate taxes in an escrow account.
An Alternative Exists
Your child’s financial security and future are important. But is it financially savvy to give your child your home? Will the gift tax financially burden you? Is the best option to let your child inherit your house after you die, a situation in which an estate tax may or may not be applied? An estate or inheritance tax has a higher exclusion amount, which may reduce the tax burden for everyone involved.
Joshua Cintron is a college professor of business, finance, human resource and critical thinking courses. He holds a Masters degree in public administration from Bellevue University and a business credential from the Colorado State Board of Community Colleges and Occupational Education, Career and Technical Education. His resume also includes joshuacintron.com.