Frequently, parents choose to transfer ownership of a home to their adult children to remove it from their taxable estates. But before taking such action, consider the potential estate tax implications.
If you give away your home, the transfer is subject to gift tax. After exhausting the $14,000 annual gift exclusion ($28,000 for a married couple), your $5.45 million gift tax exemption is triggered, eroding the available estate tax exemption at your death.
In addition, when you give a home to your children, their basis for income tax purposes is your cost. This increases the likelihood that they’ll owe substantial income tax on the subsequent sale of the home, assuming it has appreciated and will continue to do so.
Contrast this with the fact that, if you hold on to the house until your death, your children can receive a step-up in basis and their cost will be equal to the home’s value as of your death. Alternatively, if you sell the home to them at a below-market price, the IRS treats the difference between fair market value and the sell price as a taxable gift. Either way, it may not be a desired tax result.
Instead, consider using a qualified personal residence trust with a reduced gift tax cost or an intentionally defective grantor trust that freezes the home’s value for estate tax purposes. Bear in mind that there are myriad ways to transfer your home to your children, so explore all of your options.
