“In many families, real estate survives from one generation to another. These transactions occur for several reasons, including passing down a legacy to loved ones or implementing an estate planning strategy. Tax consequences of property transfers aren’t always considered by taxpayers when transferring property.”
Before attempting a deed, will, or trust property transfer, other considerations are important. So, the following are common scenarios involving family members transferring property and their tax implications: Let’s know all about Intra-familial property transfer.
Giving a house to your child or grandchild
The property owner can gift it during their lifetime or include it in their estate plan, so it passes upon their death.
There can be a title ownership change with some routine paperwork filed with the county recorder’s office. Several real estate attorneys, title companies, and other professionals can assist with the process.
In most cases, parties can complete and file the necessary paperwork with the county recorder’s office. To ensure a clear title to the property, it may be necessary for the parties to hire a title company.
Transfers of homes to children and grandchildren
The parent or grandparent would be entitled to these benefits if they sold their property at fair market value, or any amount, to their child or grandchild.
Children or grandchildren can buy their own homes, take out their loans, and receive loans from their parents or grandparents. Or a combination of a new loan and a gift from their parents or grandparents. Such as a gift of equity, which we can use to pay off a down payment (see below for more information on gifts of equity).
Cash used to buy
Children or grandchildren with the cash to buy the property from their parents or grandparents can complete the buy with some paperwork and filing with the county recorder.
Besides, the child or grandchild who purchases the home should consider using a title company to ensure a clear title.
New traditional loans used to purchase
A child or grandchild who requires a loan to sell the property will be required to provide certain routine documents associated with any arms-length sale. For example, a traditional bank, a mortgage broker, etc., including the buy agreement (i.e., contract to buy the home), escrow arrangements, and clear title.
Due to this, the sale must resolve any encumbrances or debts on the property. There is a rule that lenders will require the resolution of existing mortgages, tax payments, etc., as part of the transaction.
The benefit of ‘equity’ together with a brand-new traditional loan.
“Gifts of equity” are a valuable tool for assisting children and grandchildren in purchasing a home. An example would be a $1,000,000 home sold to a child or grandchild with 20% down, or $200,000.
The remaining 80%, or $800,000, can finance by a traditional lender. Instead of using money as a down payment, parents and grandparents can “gift” $200,000 of their equity to their children and grandchildren.
Thus, the child or grandchild does not have to put any cash down for a traditional loan. A gift of that amount would result in a tax deduction for the parent or grandparent.
The loan from a parent or grandparent / “seller financing.”
When the parent or grandparent sells the home, the child or grandchild can take over the mortgage repayments. To repay the balance, the parents or grandparents can ask the child or grandchild to make installments over a set period.
It is generally allowed to charge below-market interest rates on loans. In the same way, a home loan interest qualifies for itemization on a tax return. And the child or grandchild repaying the loan can claim the interest on their tax return.
In contrast, the parent or grandparent who receives the interest may have to report the payments as income.
There should be a “Deed of Trust” (a security instrument registered with the county against the property’s title) and a “Promissory Note” (a contract between the parties about the loan amount and terms of payment).
To guarantee payments, the lender (parent or grandparent) should draft, sign, and notarize a Deed of Trust, providing the lender with a security interest in the property.
You can use a third-party servicing company for payments, collections (and foreclosures).
Below fair market value sale
It is up to the child or grandchild how much they wish to pay for the home. The difference is likely a “gift” to the seller if the buy price is below fair market value.
A parent has gifted $400,000 to their child if the house is worth $1,000,000 and their child purchases it for $600,000.
Husband/Wife Change in Ownership Exclusion
The change in ownership reassessment need of Proposition 13 does not apply to transfers of property between spouses during the marriage (or transfers between former spouses after marriage).
Thus, the property transfer between husband and wife should not result in a reassessment. To file a claim, you do not need to submit a claim form, but you may need to submit more documentation. Refer to Section 63 of the Revenue and Taxation Code
Registered Domestic Partners Change in Ownership Exclusion
The Revenue and Taxation Code 62(p) excludes transfers of real property between relatives (as defined in Section 297 of the Family Code), considering the changes in ownership as of January 1, 2006. Partner transfers include:
- Transfers to and from a trust for the benefit of the partners.
- Additions to deeds by the partners.
- Transfers upon their death.
- Transfers following settlement agreements or court orders.
Cotenancy Change in Ownership Exclusion
Transferring a cotenancy interest between cotenants after January 1, 2013, to another may be exempt from reassessment if certain conditions exist. A claim form and an affidavit of residency were significantly filed on behalf of the transferee. Following Revenue and Taxation Code 62.3,
Parent/Child Change in Ownership Exclusion
Transfers of the main house (in either direction) and up to $1 million (taxable value) of other property between parents and their children may be exempt from the change in ownership reassessment, provided a claim for exemption is submitted.
The file must claim within three years to receive the benefit. The exclusion is only available from the lien date following the filing date if a valid claim has appeared after that initial three-year time limit has expired.
On or after September 30, 1990, the three-year filing period applies only to transfers between parents and children made after November 6, 1986.
Tax considerations / step-up in basis explained
We need an advisor to address important tax issues. One crucial point to note: gifting the property during life (versus as part of an estate plan after death) will cost the heirs a tremendous tax benefit on a step-up basis.
Can you explain this? In the case of gifted or inherited homes, a child or grandchild may have to pay capital gains taxes based on several factors. For calculating capital gains when a property is sold, inherited property values are “stepped up” to their value at the time of death.
A “step-up” makes it possible to calculate any “gains” based on a higher property value than its sales price. A property left to heirs during a lifetime will be lost to the heirs due to tax benefits. By “stepping up,” the heirs can enjoy considerable tax benefits.
Family property transfer: Adding a joint owner
The home will automatically pass to your family when you die if you include another family member on the deed.
When a relative joins as a joint owner of a property without consideration, the donation counts as a gift of 50% of the property’s fair market value. A gift with an exclusion value exceeding the annual exclusion limit must be reported by filing a gift tax return (Form 709).
Gift taxes are unlikely to be owed because of the unified gift and estate tax exemption for 2022, which is $12,060,000. Also, each owner must adjust their basis in their respective ownership interests at the transfer date.
To calculate estate tax, the personal representative of the deceased property owner must include the fair market value of the decedent’s ownership interest in the gross estate.
It is generally the same amount included in the decedent’s gross estate that the surviving owner receives the decedent’s ownership interest on a stepped-up basis.
The surviving owner determines their total adjusted basis in the property by combining the stepped-up basis in the inherited part and the basis they received from the gift. (The basis determines if a home will generate gains or losses when sold.)
Family members who are added to the deed while you keep exclusive use rights for the rest of your life may have different tax consequences. Next, we discuss a life estate that results from this situation.
Family property transfer: Gifting real estate
You intend to gift real estate property to a child or grandchild.
The IRS considers a plot of land you give your child or grandchild a gift. Tax deductions don’t apply to gifts of real estate to children or grandchildren. It doesn’t matter how much you sold the property; you can’t claim a loss. So, the tax issues have to do with expenditures, not savings.
A donor who gifts $500,000 of land without receiving anything of that value will face tax consequences. According to the IRS, you can give $16,000 tax-free yearly to anyone you like.
Each spouse can donate $16,000 (for 2022). But, gifts over the annual exclusion amount are automatically reported to the IRS on the donor’s gift tax return. Unless you have used up your unified gift and estate tax exemption, you will not owe any gift tax.
When it comes to real estate transactions, it is not possible to stay under the radar. Plan ahead for tax implications of property transfers by doing your research.
How Do I Transfer Property To Family Members?
There are a lot of questions we get about this. When transferring property while you’re alive, as many of these methods are costly, complicated, and time-consuming, you have many options, both before and after and in anticipation of death.
But, the options are significantly limited when transferring property and when you’re alive. People often think they don’t need to transfer ownership of an asset to a family member. But legalizing the transfer is crucial, which can be made easier by the Attorney Real Estate Group.
What is a Quitclaim Deed?
Quitclaim deeds are one of the fastest, easiest, and most convenient ways of transferring an asset to someone in your family. Unlike a general or special warranty deed, a quitclaim deed does not guarantee or promise anything about its contents.
Rather, a quitclaim deed conveys your interest in a property, no matter what it is. Hence, if you own a house and transfer ownership interest to your son through a quitclaim deed. You will receive the property in its entirety.
You will not be able to transfer any ownership interest to your son. For example, you believed you owned the house. But did not and executed a quitclaim deed transferring ownership to your son.
A quitclaim deed transfers your interest in the property, regardless of whether you own or do not own it. Other types of deeds make warranties about your ownership and interest in the property. In other words, transferring an ownership interest that does not exist or is incomplete is not illegal. As a result, you have transferred a useless document.
So, quitclaim deeds carry greater risk for the recipient. Using a quitclaim deed to sell property from a stranger is rarely recommended since you cannot guarantee what you will receive. In contrast, trusted family members do not suffer these drawbacks when transferring assets. So, quitclaim deeds are a great option for transferring property from one family member to another if you are confident in your rights to the property. Further, if any covenant issues remain after the quitclaim deed records, a general or special warranty deed may be used to clarify them.
Talk to a California Real Estate Attorney
Real estate attorneys can help you develop an estate plan that works for your needs and protects your interests. If you need to Intra-familial property transfer. With several years of experience, we guarantee the protection of your assets and the honor of your wishes. Call us today to make an appointment.