Smart Ways to Gift a Home to Your Children

Smart Ways to Gift a Home to Your ChildrenSanta Cruz homeowners in the golden years of their life may be wondering how they can gift their home to their adult children. Doing so is not as cut and dry as just letting them move in as you are aging or after passing on like it was way way back when. No matter the way that you gift a home to an adult heir of your estate, the tax collector will be waiting to collect on their new "fortune." 

The most common way of gifting a child a home is to have children inherit the home after the owner passes on. In some cases, parents are turning their homes into actual gifts before they pass on as they make plans to move to a home more suited home to this stage of their life. In some areas, this is a good plan, but in some locations around the country the gift is considered a type of sale and the property taxes then increase to current levels. 

There are two little-known ways that may be a smarter way of dealing with tax payments when gifting a home. These methods include a parent financing their child purchasing the home from them and/or selling the home at a significant discount. Before jumping in and choosing these methods it is always wise to look at all of the details and how they would pertain to your specific home gifting. In some cases they may be more helpful in others they may cause more headaches. 

"Gifting" a Home to a Child Through Parent Financing

This method can help children to get financing for the purchase of a home when it may be difficult for them to qualify for a mortgage right now. They can also take advantage of purchasing a home through a lower interest rate and helps a parent to benefit from additional monthly income in retirement. 

The financing contract should be written up with the help of a legal professional to be seen as legal and binding. The paperwork needs to be signed by both the lending parent and the purchasing child or children. It should include the amount of monthly payments and the date they are due. It should also include a maturity date and document the interest rate charge which should equal or go above what is set by the IRS at the time the loan agreement is made. 

Making sure you go through the proper legal steps for the loan is very important. This helps the home purchase to not be taxed more than it should and gives the purchaser, the child, or children an opportunity to deduct mortgage interest payments on their tax returns. It is good to be aware that the parent loaning the money will owe taxes on the interest they are receiving as it is seen as income. 

There are a few ways that the parent financing method can be made even sweeter and that is when you couple it with annual gifts of up to $15,000 per person with tax exclusions. This will have to be made separate from the note (loan/mortgage)  payments received. When the limit is adhered to, no gift will need to be reported on a tax return. Another way to sweeten the deal is using this in conjunction with a bargain sale. 

What is a Bargain Sale?

A parent can sell a child their home at a lesser cost than fair market value. It is good to note that the difference between what the home is currently worth and what the home is actually sold for is considered a gift to your child by the IRS. The parent will not owe money on this gift unless they have made a lifetime of gifts larger than the current federal gift tax exemption limit. This amount is pretty high but worth making sure you check. Regardless of the amount however a federal gift tax return will be required on Form 709. 

Before using this method it is good to look over what the tax basis of the property is with a professional and how it will play into the tax responsibilities on the sale of the home. In some cases, if the parent has owned the home long enough they may be able to use the benefit of a home sale exclusion. The child purchasing the home is not taxed on the gift they receive but will be taxed on the amount they purchase the home for which is still less than if they purchase a home at full market value. 

If you are considering gifting your Santa Cruz home to your children it is wise to talk with a tax professional and a real estate professional about the best plan of action for doing so to ensure all parties are well cared for in the transaction. 

For more information on Santa Cruz real estate please contact us any time. 

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