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.
Options For Gifting A Home
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 the 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.
Understanding Capital Gains Tax Consequences When Gifting a Home
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 taxes are 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 fair market 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 was worth about $400,000. At the time you completed the transfer all at once, it’s worth $800,000. Under gradual gifting, the tax consequence your children would pay is on 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 number of other assets in your estate, the 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, to learn more about adding gifting as part of your estate plan. 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. To understand the benefits of establishing an estate plan read more here. If you have additional questions or want to receive personalized advice, contact our team of estate planning attorneys.
*2020 limits; subject to future change