In the end, most of us want to leave our children our assets, which usually includes giving them our house. Unfortunately, this move usually comes with heavy tax consequences, which can be a huge burden on many families.
There are, however, some ways to avoid paying taxes on this gift to your children, with several options that will work for you depending on your unique circumstances. Here are some of the most popular tax-free options to give your children your home.
Best Tax-Free Ways to Give Your Home to Your Children
- Put the House in a Trust – The property can be transferred to your children via a trust. An irrevocable trust which includes your kids as beneficiaries excludes the home from your estate when you die. This means there will not be any estate taxes applied nor will it be subject to the Medicaid real estate rules.
- Sell the House – Selling your house to your children is another option to avoid paying taxes. If you sell your home to your kids for less than the current fair market value, the IRS considers the difference in the lower price and full market value of the home a gift to your children. The yearly gift allowance of $15k and the $11.7 million gift tax exemption will apply to this transaction much as they do on the gifting option.
- Gift the House – When property valued over $15k is gifted in a single year, a gift tax form must be filed with the IRS. You are allowed to give a total of $11.7 million in gifts throughout your lifetime without paying a gift tax. So even if you file the gift tax form, changes are good that no taxes will be owed as long as the value is not over the $11.7 million limit. Be aware of excessive capital gains, though, since gifted property is not “stepped up” and they will have to pay these expensive taxes if they sell the property.
- Put the House in Your Will – The least complicated way to give your home to your kids is to simply leave it to them in your will. Your estate will not be responsible for taxes unless it is valued over $11.7 million as of 2021. When they inherit the property, the amount of capital gains taxes will be reduced should they decide to put the home up for sale. The tax basis will be “stepped up,” which indicates that it would be taxed on the property value at the time of inheritance, instead of the original value of the home.
All of these are valid ways to leave your house to your children. Individual circumstances determine which option is best for you and your family.
Consider talking to an elder care or probate attorney for guidance.
