Learn about the benefits and drawbacks of donating your house or property to a family member.
What you will discover:
What are the advantages of giving property to family members?
What are the various procedures for transferring property to family members?
Can I sell the property to a family member for less than market value?
What are the tax implications of giving a house or property?
Can I reside in my house after it has been gifted to me?
It sometimes makes sense to donate or sell your house or other property to a family member. Whether you are feeling charitable or trying to assist or provide for your family, following the proper measures will help you avoid needless taxes and guarantee everything is legal. This needs some forethought and organization, but it is doable with a little legal assistance.
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What are the advantages of giving property to family members?
Gifting property to friends or relatives while you are still alive guarantees that the property is handled according to your preferences and avoids future legal battles over ownership. Family feuds over who receives a person’s property after death may occasionally result in the property being sold during probate so that the money can be divided among the heirs. Even if your objectives are clearly stated in your Last Will and Testament, probate issues might occur. Probate issues may be expensive for your heirs and may result in the forced sale of the house. Gifting a house or property while you are living might assist avoid such difficulties and costs after your death.
However, there is one significant disadvantage to donating property while you are still alive: taxes. While the donation is quite likely to qualify under the combined federal gift and estate tax exemption level, which was $11.7 million in 2021 and will be $12.06 million in 2022, when a property is transferred after death, your heirs may profit greatly. Furthermore, donating a property may result in a tax reassessment. If you are thinking of giving your property to a family member, consult with a lawyer beforehand to examine the tax implications and alternatives.
What are the various procedures for transferring property to family members?
Aside from incorporating it in your Last Will and Testament, there are various ways to donate property to family members. Some examples are:
Direct gift: If you give the property to a family member while you are still alive, it counts against your $11.7 million (in 2021) or $12.06 million (in 2022) combined federal gift and estate tax exemption, less the $15,000 yearly gift exception. If you decide to relocate or for any other reason, you may give the property while you are still living. To transfer ownership, you may normally use a Quitclaim Deed.
While not a typical gift, selling for less than market value, or just enough to pay the balance of your mortgage, means the difference between the market and sale price forms part of your gift exemption.
Seller-financed sale: If you are attempting to assist a family member in purchasing their first house and the one you would want to give them is entirely paid off, you may want to explore arranging your own Mortgage Agreement. You may set up reasonable monthly payments and conditions. If you die before the loan is paid off, you should alter your will to include a provision for the mortgage amount to be forgiven as part of your gift exemption.
Joint tenancy: A joint tenancy specifies more than one property owner. If you engage into a shared tenancy arrangement with two family members, the property will pass entirely to them when you die. However, this may result in certain tax penalties, which you should be aware of.
Living Trust: Putting your property and other assets in a living trust enables them to be dispersed upon your death or when specific criteria are satisfied.
Each of the ways listed above has benefits and downsides, and anyone considering giving property should get legal counsel before proceeding.
Can I sell the property to a family member for less than market value?
You may sell a property for less than market value to a family member or anybody else. However, you must proceed with caution. The difference between the fair market value and the purchase price is included in your gift exclusion under current tax legislation. Remember that you have a $15,000 yearly gift exclusion, but anything beyond that counts toward your combined federal gift and estate tax exemption.
If you choose to sell your house in this way, be sure you do it lawfully and in accordance with state and municipal rules. To indicate that the property is yours to transfer, you may complete a Grant Deed or a Warranty Deed and submit it with the local recorder. However, you should consult with a lawyer about the legal requirements in your county or state to verify that the sale and transfer are legitimate and that everyone’s rights are safeguarded.
What are the tax implications of giving a house or property?
If you leave your house or property to a family member in your will and do not exceed your combined federal gift and estate tax exemption, you should have no tax liability. The worth of the residence at the time of transfer is its current market value, therefore there are no capital gains taxes to pay, and it is free from estate taxes. However, gifting your house or property during your lifetime is not the same.
The same unified federal gift and estate tax exemption applies if you donate a house before your death, but the tax ramifications are quite different. A property may be reassessed in this situation, and the tax basis for the donated house will be based on your initial purchase price, resulting in higher capital gains taxes. If you have any legal issues concerning the procedure or possible repercussions of giving property, do not be afraid to consult a lawyer, since doing so might save you thousands of dollars in tax obligations and help you avoid expensive errors.
Can I reside in my house after it has been gifted to me?
There are many methods to give your house to a family member while maintaining your right to reside there. That may be accomplished by establishing a shared tenancy, a life estate, or even establishing a Living Trust. However, since these agreements may be difficult, it is essential to get legal advice if you want to stay in your house after donating it to a family member.
