How To Gift A House To Someone
If you own your home, you have the right to gift that property to whomever you like. However, if not done properly, the IRS will want in on the deal. Always consult with a real estate agent or attorney in every real estate transaction. This will guarantee you’re taking the right steps to avoid unnecessary tax implications.
Continue reading to learn about the different methods for gifting a house and their tax implications. For each method, we’ll run through an example using a home with a fair market value of $350,000.
1. Buy A Home For Them
If you’re fortunate enough to be able to purchase a home for someone, it’s possible in two ways:
- Buying a house with cash: After you purchase the home, make sure the deed is in the recipient’s name. This will give them full responsibility for the property and taxes. It also gives them the freedom to do what they wish with the home, such as renovating.
- Investment property: If you buy a house for someone with a mortgage, it’s considered an investment property since you won’t live there. Please be advised this method comes with higher interest rates and down payments compared to primary properties.
Tax Implications
Buying a home for someone will exceed the annual gift tax exclusion of up to $15,000. For that reason, the IRS will prompt you to file Form 709. Despite a lifetime exclusion for couples, you will have to report gift tax and real estate over $15,000 to the IRS against your lifetime exemption.
The recipient of the property doesn’t have to report the gift, meaning their income tax won’t be affected. When the donor exceeds the exclusion ceiling, they can expect to pay 18% – 40% in a gift tax.
In the example below, the gift tax is 20% and the fair market value of a house is $350,000. Here’s how the donor is impacted.
- Fair market value: $350,000
- Taxes owed: $70,000
2. Sell Your House To Them On The Cheap
Selling your home to a friend or family member is slightly different from selling to a stranger. Instead of an arm’s length transaction, both parties will participate in a controlled transaction. A controlled transaction is a deal that involves two related parties. The IRS will monitor closely to determine if the price of the home meets fair market value or is considered a gift.
Tax Implications
If you’re selling the home below fair market value through a gift of equity, you must report it to the IRS if it exceeds $15,000. The seller may have to pay a gift tax, subject to the lifetime exclusion limits mentioned above for gift and estate tax. They may also be subject to capital gains tax depending on how long the donor had the property and its value. Here’s an example where you gift your child a property $100,000 below the fair market value and the current tax rate is 15%.
- Fair market value: $350,000
- Sale price: $250,000
- Taxes owed: $37,500
3. Give Your Home To A Charitable Organization
Gifting a property is beneficial not only to the charity but also to you. The biggest advantage is a hefty tax deduction that can be up to 60% of your income. The value of your home when you first purchased it could be the amount of the tax deduction. If your deduction is based on the current value of your home, your deduction will be limited to 30% of your income.
Tax Implications
Since you would be making a generous contribution, tax consequences will be scarce. Reassigning the property to a charity instead of selling it to someone will eliminate the home from your estate. Therefore, estate taxes will not be a concern for the gift-giver.
Most importantly, if your property is being gifted on an appreciated basis (the current value of your home) and not the cost basis (the price paid for the property, any buyer-paid closing costs and the cost of improvements made to the property), you’ll have the opportunity to avoid capital gains tax.
Be sure to consult with a tax advisor throughout this process.
- Appreciated basis: $350,000
- Tax deduction: $105,000
