Transferring real estate to adult children can be complicated.
The current housing climate makes purchasing a home rather challenging.
As a result, fewer people are buying and selling.
It also underscores the importance of including home transfers in estate planning.
According to a recent Urban Turf article titled “How Can Parents Transfer Real Estate to Their Children?,” there are various ways to accomplish property transfers.
What are some common options?
A simple way to transfer the family home is to give it to children.
Essentially, parents transfer ownership, and there is no monetary exchange.
The transfer will trigger a gift tax for parents if the value of the home exceeds the annual gift tax exclusion limit.
That limit is $17,000 per donee in 2023.
So, if the value of the home gifted exceeds the total available gift tax exclusion amount, the parents must file a Form 709 Gift Tax Return for the year of the gift.
While the children will not pay any taxes on the transfer, their tax basis in the home will be that of their parents.
For example, assume the parents bought the home for $100,000, and the fair market value is now $400,000.
If the children turn around and “flip” the home with a quick sale, they would be subject to capital gains taxes on a sale price above $100,000.
With a sale, there is a transfer of money for the home.
Parents often give their children a low-interest rate mortgage or a reduced price.
Doing so allows the children to have a financial stake in the home while providing monetary compensation to parents.
That noted, the parents will be making a gift in the form of the below-market interest rate amount or the reduced sale price.
Again, this may trigger filing a Form 709, if the gifted amount exceeds the annual gift exclusion.
Parents can transfer their home to children at death using a trust.
The home can be titled to the trust with the children as beneficiaries.
Trusts can be structured in a variety of ways.
Some families use the home to generate income for the beneficiaries, while others choose to have home received outright at a designated time.
Trusts can also be beneficial for taxes.
When “inherited” versus “gifted,” the home enjoys a new date-of-death tax basis.
What if the parents purchased the home for $100,000, and the children inherited the home with a fair market value of $400,000 upon the death of the last surviving parent?
If the children “flip” the home with a quick sale for $400,000, then the children pay no capital gains taxes and keep the full $400,000.
This involves parents retitling the home to add the names of their children.
As a result, the children become co-owners with their parents.
This can avoid probate if the children survive both parents.
However, when the children are added to the title, then the home is subject to potential divorces, lawsuits, and bankruptcies of the children.
A better option, if available under state law (like in Kansas and Missouri), is to create a “transfer on death deed” to transfer the home to children without probate only at the death of the last surviving parent.
With this option, parents transfer ownership to their children while reserving the right to live in the home.
Parents retain control and ownership of the home while they are alive.
The children will eventually receive the home without probate.
However, unlike with the “transfer on death deed,” the parents must have their children’s permission to sell their home while living.
To select the best option for your family and your goals, work with an experienced estate planning attorney.
Reference: Urban Turf (March 13, 2023) “How Can Parents Transfer Real Estate to Their Children?”