Can you give real estate to a family member?
Logically, if you own a piece of real estate outright, there should be no reason why you can’t give it to someone else. While it’s true that you can give away real estate, it isn’t as simple as it should be. The IRS wants in on the deal and you have to do it right to save on taxes.
Before you gift a property to a loved one, we highly recommend consulting an experienced, local real estate agent. A realtor can help you navigate the paperwork and potential tax burden that comes with the process. Find a top agent in your area!
If you're still in the early stages, finding out your home's true value is a good place to start. It will help you determine how much tax you may owe on the property when gifting it, so you can decide whether that's the right step.
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JUMP TO SECTION
- 1. Can parents gift a house to their child?
- 2. Is gifted real estate taxable?
- 3. How do you avoid gift tax on real estate?
- 4. What is a gift deed for a house?
- 5. Is a quit claim deed considered a gift?
- 6. How do you transfer ownership of a house with a mortgage
- Gifting Real Estate: Conclusion
1. Can parents gift a house to their child?
If you own your home free and clear, you can gift it to anyone you want to.
The transaction must meet the IRS definition of a gift. In other words, the grantor must give up all rights to the property and must change the title into the grantee’s name. The grantee must accept the gift willingly and take physical possession of the home.
What if the parents want to sell it to their child? Learn more about that here.
2. Is gifted real estate taxable?
Unfortunately, yes. The IRS assesses a gift tax on the person who gave the gift.
However, the entire value of the home is not taxable. Similar to the capital gains tax, the taxable amount for a gift tax is the value of the home minus the basis amount. For example, if the home is worth $350,000 (home value) and the gifter paid $200,000 (basis amount) for it, the taxable amount is $150,000.
3. How do you avoid gift tax on real estate?
Paying taxes for being generous feels kind of like a rotten deal. Thankfully there are ways to lower, or avoid altogether, gift taxes on real estate.
Each year, each person is allowed to give away up to $15,000 tax-free. In a real estate transaction, this applies to both grantors and grantees. If a married couple owns the home, each is allowed their own $15,000 exclusion. Additionally, if a married couple is receiving the home, each individual gets an exclusion.
In this example, you can exclude $60,000 from the gift tax — $15,000 for each of the four people involved. This is assuming that no one has already used their gift tax exclusion earlier in the year.
In the earlier example, there was a taxable amount of $150,000. With this exclusion, you can whittle it down to $90,000.
If you want to eliminate the gift tax altogether you can exclude the remaining $90,000 by using your unified credit. However, the unified credit is a fixed lifetime amount of $11.4 million. At the time of your death, any assets that you own over this amount will be subject to estate taxes. Unless you have a sizeable estate, this won’t be a big deal but is worth noting.
4. What is a gift deed for a house?
The gift deed is the legal document used to transfer ownership of a house when no money is changing hands. Even though no money is involved, the recipient must report the gift to the IRS.
For the document to be legal and binding, the signing must be witnessed by two disinterested witnesses. For example, if parents are gifting a house to their child, the child’s spouse cannot act as a witness since they would have an interest in the transaction.
5. Is a quit claim deed considered a gift?
A quit claim deed is used to remove a co-owner from the home’s deed. It is not a gift. A common example is during a divorce when one spouse is to be removed from the deed. Sometimes the spouse may give up their portion of the house with no reimbursement. Other times the grantee may pay them. In that case, the recipient of the payment must pay sales tax.
6. How do you transfer ownership of a house with a mortgage?
Legally, you can gift your house to anyone whenever you like. Your lender might not be too happy about it if there is still a mortgage, though. The property is supposed to be securing your loan. If you no longer have the property, they have nothing to seize if you default on the loan.
For this reason, most loans have a due-on-sale clause. This means the lender can call the entire loan due immediately upon transfer of the home. It doesn’t matter whether the transfer is a sale or a gift.
What if you want to transfer the mortgage as well? It’s possible but difficult. First, the mortgage must be assumable, meaning the terms allow for someone else to take it over. The lender also usually has to approve the transfer and the new borrower. If this ends up to not be possible, the new owner would have to take out their own mortgage and the old owner remains responsible for the balance on their loan.
Gifting real estate: Conclusion
Gifting real estate isn’t quite as simple as it seems like it should be. If you don’t go about it the right way either the grantor or the grantee could end up paying a hefty tax bill.
To make sure the transfer goes smoothly, it’s always good to seek the advice of a real estate professional. They will know how to handle the process to your benefit. Plus, if you decide to buy a new house after gifting your current one, you’ve already got an agent on the job.
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