How To Gift Your Children A House Without Major Tax Ramifications

Keychain house and keys with red ribbon and gift box on white wooden background.
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Property transfer is one of the easiest ways to ensure that generational wealth gets passed down to younger generations. With skyrocketing home prices and slower-to-launch career paths following the financial crisis and the pandemic, many older parents are opting to pass down homes to their children in order to help secure their futures.

See: ‘Tis the Season To Gift Crypto: Taxes and More Variables You Should Consider Before You Commit
Find: How to Leverage Your Marriage to Avoid Paying Gift Tax

One of the biggest concerns with doing so is the tax hit it could cause for both sides. Most financial advisors will advise against simply writing your home over to your children. This method is called title addition, which simply means parents gift children their homes by adding children’s names to a home title. This can potentially create several complications. Adding a child to a home’s title can be considered a transfer and trigger federal and state transfer taxes. You need to consult with a tax professional or license financial advisor to make sure your state will not trigger such taxes. Additionally, children added to a home’s title through their parents can actually jeopardize that home if the children take out debt that is then secured by that home — which could result in foreclosure.

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Instead of taking the risk, here are some easy and financially sound options.

Cash Sale

An easy way to give a home to your children while you are still living is through a home sale followed by a cash gift. This means you sell the home and give your children the cash proceeds to buy their own homes. This can have a few tax benefits. For one, selling your home does not result in capital gains taxes. Giving cash also eliminates any worries about you or your spouse subject to any future property issues that your children could initiate. Keep in mind though that cash gifts could be subject to tax rates ranging from 18-40% depending on the size of the gift if you exceed the $30,000 exclusion per year. 

Sell Them The Home

An even easier way to gift your home to your children is to simply sell them the home and allow them to carry the mortgage. You would sell your home to your children at market value, often using seller-carried financing. Often also called “seller carryback financing”, this is when a seller acts as the bank and carries a second mortgage on the property. The buyer then pays it down each month along with their first mortgage.

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Revocable Living Trusts

A revocable living trust is a living will that instructs that the parents will gift their children homes but remain in those homes until their deaths. There are several benefits to putting our home into a trust. For example, let’s say you bought a home for $500,000, but by the time you die, that same home is worth $1,000,000. If your children go to sell it, they will be subject to pay taxes on the difference. If the home is passed down in a trust, this is not the case.

See: Living Trust vs. Will: Which Is Right for You?
Find: 10 Tips To Increase Your Home Value on Any Budget

The best thing to do before considering transferring your home to your children is to consult a licensed tax professional or financial advisor. They can advise you on how to title the properties correctly and transfer them while maintaining your financial security and securing your children’s futures.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 

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