When people retire, there’s often a temptation to downsize their home, to give themselves less space to clean or stairs to climb. It can also be a monetary decision, to save some money on a smaller home. Family homes aren’t that easy to get rid of, though. There is often a huge emotional attachment to the home, and you may want to keep it in the family. You can deed the home to your children as a gift if you’re willing to forego some benefits. But please, don’t deed your home to your kids.
Simply deeding the property as a gift, no strings, could be a huge mistake. You could miss out on a huge tax break, and drop a giant tax bill in your kids’ lap.
If you decide not to sell, you are obviously missing out on any profits from the sale of the home. The capital gains exclusion taxes are what will really hurt, though. The Capital Gains Exclusion allows you to exclude up to $250,000 (or $500,000 if filing jointly) of your capital gains from taxes. If you’re filing jointly, you could be foregoing a $500,000 tax-free profit from selling the home, but that disappears if you leave the place to your kids.
Even if you’re cool with that, you could still be sticking a separate, large bill with your kids.
Deeding a property to someone (including your children) means that they will inherit the “basis”, or the original price of the home. That is how capital gains are calculated. If or when they sell it, they will be taxed on the gains between the original, basis value of the home and the current value. If that’s appreciated a great deal, like most homes, your kids are in for a big tax bill, unless they live in the house as their primary residence for two of the five years before they sell. If they do that, they will be eligible for the capital gains exclusion we were talking about earlier.
If your children INHERIT the property, in your will, they should receive the home at a fair value, as opposed to your basis value from when you purchased the house. Say you leave them the house and it’s valued at $200,000. They can sell the house and only be forced to pay taxes on what profit they made on that amount. If you deeded them the house, and you originally paid $75,000 for the house, they would pay taxes on the difference of $125,000.
You’re going to do what’s best for you and your children, but deeding the house directly to the kids can be a costly mistake if not handled correctly. Leave it to them in your will if you want them to have it, or sell it if you want to give them money while you are still around to enjoy it with them. To learn more about this, visit IRS.gov and look up Publication 551, Basis of Assets.
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