Should I Give My Home to My Children as “a Gift”?

Many people wonder if it is a sensible idea, given their personal tax situation, to give their home to their children as a gift.  For middle class or upper middle class families this really is a moot question, as the threat of steep taxation clearly applies only to folks with high net worth.  Bottom line, you can gift $11.58 million over an entire lifetime without bring hit with a gift tax. 

How many people do any of us know who will  be giving away over eleven million dollars in real estate over the next 50 years?  Think for a moment how wealthy you would have to be in order to give away over eleven million dollars in property to your children.  Regardless,   giving away a house to offspring can have a variety of peculiar financial or tax consequences, among other outcomes. 

In 2021, and the years following, the annual “gift tax exemption” will stay at $15,000 per recipient. This means you can give up to $15,000 to as many people as you want during the coming year without any of it being subject to a gift tax.

A gift tax is imposed if you transfer money or property to another person without receiving at least equal value in return. This could apply to parents giving money to their children, the gifting of property such as a house or a car, or any other transfer. There is also a lifetime exclusion of $11,700,000. The very idea that any entity outside a family group can make decisions on taxing what a family does or does not do with their real estate is a most unpopular idea among most citizens.

Being Aware of all Consequences, Giving Your Home to Heirs

ElderLawAnswers.com weighs in on this issue, which is highly appropriate, as these writers and editors frequently deal with tax problems facing older Americans. June 23, 2020 they published an article entitled “Giving Your Home to Your Children Can Have Tax Consequences”…

“When you give anyone property valued at more than $15,000 in any one year, you have to file a gift tax form. Also, under current law (2020) you can gift a total of $11.58 million over your lifetime without incurring a gift tax. If your residence is worth less than $11.58 million, you likely won’t have to pay any gift taxes, but you will still have to file a gift tax form.

While you may not have to pay gift taxes on the gift, if your children sell the house right away, they may be facing steep taxes. The reason is that when you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. For example, suppose you bought the house years ago for $150,000 and it is now worth $350,000. If you give your house to your children, the tax basis will be $150,000.

If the children sell the house, they will have to pay capital gains taxes on the difference between $150,000 and the selling price. The only way for your children to avoid the taxes is for them to live in the house for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.

Inherited property does not face the same taxes as gifted property. If the children were to inherit the property, the property’s tax basis would be “stepped up,” which means the basis would be the current value of the property. However, the home will remain in your estate, which may have estate tax consequences.

Beyond the tax consequences, gifting a house to children can affect your eligibility for Medicaid coverage of long-term care. There are other options for giving your house to your children, including putting it in a trust, or selling it to them. Before you give away your home, consult your elder law attorney, who can advise you on the best method for passing on your home…”

Potential Property Tax Surprises for the Middle Class

As we can plainly see, if you’re not extremely wealthy you don’t face the same severe real estate tax burden that high net worth families face when gifting property to offspring. However, the tax man just doesn’t quit there. If you leave your home as part of your entire estate to your children, the property’s “tax basis” would be stepped up, in other words the “basis” would be the actual current value of your inherited property. 

Moreover – if the house remains in the estate, it will most likely will impose a significant estate tax burden on you, unless you take advantage of some other options, such as using an irrevocable trust loan in tandem with Proposition 19, to lock down a low Proposition 13 protected property tax base.

On top of these sort of tax consequences, middle class and even upper middle class homeowners are generally stunned when they discover that  gifting a home to heirs can also affect their eligibility, when becoming elderly, for Medicaid “long-term care” coverage. What many senior Californians call “a sneak  attack”.

Options to Help Your Children Avoid Property Tax Reassessment

Fortunately, there are some attractive options that you, as a home-owning parent, can turn to – prior to giving your children a house… such as (a) placing the house into a trust; (b) speaking with your children about how loans to irrevocable trusts work in their favor  when used in conjunction with Proposition 19 to buyout property shares from siblings – in other words keeping the home at a low property tax base with an irrevocable trust loan from a trust lender     whose expertise includes taking complete  advantage of California Proposition 19 parent-to-child property tax transfer on an inherited home as another option to turn to when you’re gone; or (c) simply selling your home  to your kids at an incredibly low price.

So before you decide to gift, or give away, your home – definitely consult with an estate lawyer, or an elder law attorney… who can advise you correctly on the best next-steps for transferring property over to an heir or several beneficiaries. Your children may very well turn to an irrevocable trust loan down the road, and this could save them from a severe tax burden that they may not even be aware of at this stage.

Naturally, if you have several children and some wish to buyout other siblings who decide to sell their shares, then your children who want to retain your property may wish to enlist the help of a trust lender as well as an attorney, to get an irrevocable trust loan to buy those siblings out while keeping the home at a low property tax base, given that your home is your primary residence, which is most likely is.