You would like to pass a house tax-free to your heirs. After all, you want to give them a gift, not the burden of taxes. But how do you do that? Here are some key tips:
Tips to Pass a House Tax-Free Through a Will
When you do your estate planning, you can make a plan to pass your house tax-free to any heir(s) that you would like. For most people, this is the best way to make sure that you’re passing along the home with the least cost to anyone.
The most important thing is to consider the total value of your entire estate (not just your home). If the value is over $11.58 million (this is called the unified federal estate gift and estate tax exemption amount; the amount is as of 2020), then you’ll have estate taxes. If it’s under that amount, you won’t have taxes. Therefore, you can pass a house tax-free through a will if your assets are below that amount. Note this amount is federal; check with your state about local maximums to make sure that your heirs won’t owe any state taxes on the inheritance.
Things to consider:
- Make sure you, and your heirs, understand the capital gains taxes that your heirs may have to pay when they sell the property. The great thing about using a will to pass a house tax-free is that it generally gives you the best option as far as this goes.
- If you owe any money to Medicaid upon your death, they can place a lien on your property, which can impact your heirs
Use an Irrevocable Trust
If you do have an estate that exceeds the $11.58 million amount then you might want to consider putting the house into an irrevocable trust instead of simply including it in the estate will. Specifically, you might want to look into a qualified personal residence trust.
Once you pass away, the house will go to the heir(s) you’ve designated with the trust. However, if you sell the house, the money goes into the trust; it can’t be cashed out should circumstances change. (Hence, the term “irrevocable.) So, this is not a move to take lightly but it’s something to consider if you have a high-value estate and want to pass a house tax-free to your children or other heirs.
Tips to Pass a House Tax-Free As a Gift
You can gift a house to your children. Don’t you have to pay taxes on that? Not necessarily. If the value of your home is less than the $11.58 million mentioned above, then you probably won’t have to pay taxes on it nor do your children. You do, however, have to file a gift tax form when you do your annual taxes. As long as the value is below that amount, it should just be a matter of filing the piece of paper but not paying any fees.
- Review the total value of your estate and your home.
- File a gift tax form with the IRS in the year that you gift the home (unless the home is worth less than $15,000)
- Offset the total amount of the gift by first using your annual gift-tax exclusion ($15000); note that this is per donee and per donor (so if you and your spouse jointly own the property and you gift it to multiple children then you can increase the exclusion amount accordingly.)
- Again, make sure you and your heirs are both aware of the capital tax gains. If your child eventually plans to sell the home, they may pay more if you gift them the house than if you will it to them.
- Do not apply for Medicaid within five years of gifting your home to your child. The details on this depend on exactly what your assets are worth but generally speaking there’s a transfer penalty if you gift assets just before applying for Medicaid.
Can You Sell the House and Gift the Money?
Some people really want to pass on their home to their children. And some children really want their childhood homes. But in many instances, it’s more about the money/value than about the home itself. If that’s the case in your family, then you might think about selling the house.
- You can sell the home at current market value then gift that money to your child. You can gift it in a will or trust or give it to them directly.
- Gift up to $5.49 million to one person are allowed without having to pay taxes on it. You will still need to file the aforementioned gift tax form with the IRS.
- Another option is to sell the home to your child at a very low price. The plus side is that they get the house, then they can sell it themselves at a higher value when the time is right for them to do so. The downside is that they may have to pay higher taxes when they do.
Can You Sell The House to Your Child for $1?
This was a common practice for awhile. You technically sell the house, so it’s not a gift. However, this isn’t something that flies anymore, legally speaking. Of course, you could sell the house to your child for $1 if you wanted. But the rest of the value of the house is considered a gift. Therefore, the gift tax rules are still relevant. Moreover, if your child sells the house, they have to report that entire difference as a gain, which impacts taxes.
If you want to sell your house to your child, your best bet as far as taxes go is to sell it to them with a small down payment as a seller-financed sale. You’ll carry the note for the balance. Your adult child will make affordable payments. You can even offset what they pay you by gifting them up to $15,000 per year (which is low enough to not qualify for that gift tax.) Since you’ve sold the home, it’s no longer part of your estate, so you don’t have to worry about that come tax time.
- Talk to Your Adult Kids About Your Financial Assets
- What to Do If Your Spouse Dies Without a Will
- What Do You Do When a Family Member Wants to Contest a Will?
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