Did you know that you can gift a home to children either all at once or slowly over time? Most people know about gifting all at once, but gradual gifting is another strategy that might work well for some. Here’s a closer look at the two ways to gift a home to children and the pros and cons of each.
Home Gifting Options
Gradual gifting takes advantage of the annual gift tax exclusion of $15,000* per year, per person. Since this is a per person limit, a married couple can gift $30,000 of a property’s value to each child (15k from each spouse) each year, tax free. This can be done for a home by filing a new deed (at the Registry of Deeds) for the property to indicate property ownership amounts for each person involved. Every year, you would then file a new deed, showing the increased amount of ownership. By gifting gradually, you can reduce the remaining value of your estate upon death, which has other tax advantages.
Gifting All At Once
The other option is to gift a home in its entirety, either before or upon death. In this case, you would use your estate tax exemption limit to avoid gift taxes. Since this is a lifetime limit that applies to anything beyond the $15,000 per year exclusion, it reduces the amount of exemption remaining for your estate and other assets.
Beyond current tax savings, you might also consider future taxes your children will owe when they go to sell your home. Calculations will vary based on whether you gifted gradually or all at once. For gradual gifting, capital gains is calculated based on the sale price and what you originally paid for the home. For gifting all at once, it’s the sale price minus the value at the time you transferred the asset (or became deceased). These two figures can be dramatically different.
Let’s assume you purchased your home for $200,000 many years ago. At the time you started the gradual transfer, it’s worth about $400,000. At the time you completed the transfer all at once, it’s worth $800,000. Under gradual gifting, your children would pay capital gains tax on a $600,000 profit. Under gifting all at once, the profit is only $400,000. Gifting all at once can therefore save on capital gains taxes.
Deciding How to Gift a Home to Children
In addition to current and future tax implications, you might also consider how much control you wish to retain over your real estate assets while you are still living. The amount of other assets in your estate, number of children involved, and other personal circumstances are also important. The decision on how to gift a home to children should not be made without viewing your overall estate plan and goals. Working with a Massachusetts estate planning attorney can help you make the right decisions when it comes to gifting a home and other assets to children. If you would like to review your estate plan and receive personalized advice, contact our team of estate planning attorneys.
*2020 limits; subject to future change