Transferring Ownership of Property from Parent to Child

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“When Transferring Ownership of Property from Parent to Child as a gift or through the transfer of equity in the property, parents should be aware of inheritance tax rules.”

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Transferring Ownership of Property from Parent to Child

Parents may want to transfer their children’s property ownership for various reasons. It often reduces the amount of inheritance tax owed or avoided. Often, it occurs so that their child may get on the housing ladder sooner.

Whatever your reasons for transferring ownership of your home to a child, you should consider several factors before doing so.

 

The Process of Transferring Ownership: What Are the Steps?

Taking these steps can help you decide whether giving your child the home is the right thing to do:

 

For the mortgage, get in touch with your lender.

The lender may let you transfer ownership with the mortgage in your name if you retain ownership of the property. Transferring funds without contacting your bank is possible. Just make sure your financial institution is not aware of the transfer.

When the property that secures the loan transfers ownership, mortgage lenders often have the right to accelerate the loan based on the clause called “due-on-sale.”

It is imperative to pay any remaining balance in full immediately. In a quitclaim deed, property ownership passes from one person to another.

 

To prepare this document, consult an attorney.

In addition to your name, you need to include that of any other owners, such as your spouse. To complete the transfer, you must sign the deed before a notary public and enter your child’s full name.

 

Recording and tax fees are due.

County clerks/recorders are responsible for recording real estate deeds. Generally, you must pay the fee for recording the new deed. Your child receives the original once the clerk’s office has recorded the deed.

You may also have to pay the county clerk/recorder’s office a real estate transfer tax. Depending on your location, transfers between parents and children might be exempt from this tax.

 

A Guide to Transferring a House to Your Children

Providing a home to an adult child is a priority for many parents or grandparents. In most cases, a couple can only afford to buy a large house once their children are grown and no longer need all the space. Parents may want their children to have access to a large house while their grandchildren are young.

The next generation may also benefit from building equity if parents help them. In highly appreciating markets or markets already so appreciating that they pose a barrier to entry to young professionals, helping young adults buy real property could give them a head start. Here are five methods for giving your child your home as a gift or transferring it.

 

A Guide to Transferring a House to Your Children

 

Bequests or gifts that are made in a legacy

After your death, your child inherits the home. This method has some advantages, particularly the step-up in basis that occurs after your passing. The home’s fair market value, if your child chooses to sell it and buy another, is what it was worth when you passed away or six months later.

There will be little capital gain if the sale occurs close to the transfer date. You may want your child to get their own home while you’re still alive, but this method requires them to wait until you die.

Parents can give their adult children a home outright in the case of gifts that exceed the annual exclusion of $16,000. Most people can use the lifetime gift exemption to shelter their home gift if they are fortunate enough to have $12,060,000 per person. It is necessary to file a federal gift tax return, Form 709.

A gift can present some additional tax challenges. Be sure to check your local property tax law before making a gift. If the homeownership change from parent to child is not exempt in all jurisdictions, then the home’s value for property tax assessment may increase from what the parent was paying, which may exceed the child’s budget.

If a child inherits property from a parent, the child shares the parent’s basis, so be sure to document any capital improvements made by the parent.

 

The loans made by a family.

When a parent finances the purchase of a home for a child, they can assist the child in obtaining it. Using the parent’s role as a lender saves the child from going through the underwriting process with a third-party lender, especially if they would have a higher interest rate due to low income or credit score.

For intrafamily loans to not be deemed gifts, a parent must charge at least the IRS’s minimum interest rate, usually lower than conventional loans. Additionally, the IRS’s minimum interest rate prevents additional charges, such as private mortgage insurance for the child, and provides a lower, more advantageous rate.

When engaging in a business transaction within a family, it is important to have documentation in place. A written installment note signed by both parent and child can prevent unwanted surprises.

As well as stating the amount borrowed, it should specify the note’s length, an interest rate at least as high as the monthly IRS interest rate, and how to handle defaults. Parents filing a security interest on their child’s note can deduct interest on their child’s Federal Income Tax Form 1040, and interest is considered income to the parent.

Gift amounts up to $16,000 annually are tax-free under the annual gift tax exclusion. Gift amounts above the annual exclusion don’t require a gift tax return.

 

A bargain at a price.

Sometimes parents sell a home for less than its full market value, but usually, they do it by accident. You act as a gift seller when you sell your child’s home for less than it is worth. Suppose you sell a house worth $800,000 to your child for $500,000. That $300,000 difference is considered a gift. A lifetime gift exemption of over $12 million to shelter the $300,000 is possible, but you must still file a gift tax return.

In addition, income tax consequences may apply. As long as they have owned the home for some time, the basis in the house will be split pro rata between the sale and gift portions if the parents purchased the home for less than full market value.

In the previous example, $250,000 would go to the sale portion, and $150,000 would go to the gift portion if the basis were $400,000. A $250,000 basis on a $500,000 house sold by the parents would generate $250,000 of capital gain, requiring the parents to pay $250,000 in capital gain taxes.

For individuals and married couples who own and use their principal residence for more than two years before a sale, the home sale gain exclusion is $250,000 per individual and $50,000 for a married couple. A child’s basis in the home combines the sale portion ($500,000) and the gift portion ($150,000), totaling $650,000.

 

Individual residence trusts which meet the criteria.

QPRTs are beneficial when you want to transfer the title of a vacation home to your child without giving up the title of your current residence.

It is possible to place a home in a trust for a specific period with a QPRT. At the end of the trust, it passes to the beneficiary, i.e., your child. The trustee can live in the house. Nevertheless, you must outlive the trust since you will lose all its benefits if you pass away before it terminates.

By reducing the value of the home gift, you are reducing the value of your rights to use it for a certain period. In any case, your lifetime exclusion can offset any gift value (of the remainder interest).

If a parent invests the same $800,000 home in a QPRT for ten years, the cost of living in the home for ten years would be $217,176. After ten years, an adult child receives $582,824, the remainder interest or value of the house. This amount is taxable and lower by the lifetime gift exclusion. This transfer does not qualify for the annual gift exclusion.

Be careful when transferring mortgaged property to a QPRT, which creates gift tax issues. It would help if you transferred a home with no mortgage or consulted a tax advisor before transferring a home with a mortgage.

 

Trust for the remaining purchase of marital property

Blended families or second spouses can benefit greatly from this last method. The grantor transfers the property to a trust and gives his spouse the right to live there for as long as the trust exists. Besides selling the remainder interest to the trust, the grantor transfers the property to his children’s trust.

It is a gift if the children cannot purchase the remainder interest in the home, and the grantor can use a lifetime gift exemption for this part of the transfer. Because the remainder interest was already sold, the portion of the home that allows the spouse to live in qualifies for the gift tax marital deduction at the spouse’s death without incurring estate tax.

The property passes free of gift or estate taxes to the grantor’s children at the end of the term or stated life. The home has no place in the grantor’s estate. There is no risk of the grantor dying during the trust term and undoing the transaction, which is why the RPM trust is more advantageous than a QPRT.

When a grantor creates an RPM trust, they have the right to use the home with their spouse, but if they divorce, that spouse can continue to use the home until the specified time has expired.

A property transfer may also trigger a tax value reassessment, so check local property transfer rules. An RPM trust is ideal for homes but works well with other types of properties, such as investible assets. In the case of a non-living spouse, they will receive an income interest or annuity during the specified term.

 

Does Anyone who isn’t 18 Entitled to Own a Property?

Your child cannot own a property in their name if they are under 18. It can, however, be held in trust until the child reaches 18 years old when they will become homeowners. Trusts of various types can apply.

With a bare trust, an adult holds the title as a nominee until the child reaches the age of 18, when they can take legal title of the property. Trustees of a discretionary trust might decide when and if a child becomes entitled to the property, another option.

 

Take Note of the Risks Before the Transfer of Ownership.

  • Your income tax situation may be affected if you sell the house during your lifetime.
  • If you need Medicaid within five years after transferring your home ownership, your house value counts against you.
  • A family member or child may file for bankruptcy.
  • Divorce could occur in your family or among your children.
  • There is a possibility that your child or family member will suffer a serious injury.
  • You could lose your child or a family member to death.
  • Your child may refuse to return the house to you if you decide you no longer want to live there.
  • If you decide to keep living in the house, you may have to upgrade it.

 

Bottom Line

For the smooth transition of property ownership to a child, it is usually best to consult a conveyancing solicitor. A professional financial adviser might also be a good idea, given the potential tax implications associated with property transfers. If you’re selling or leasing your property, Attorney Real Estate Group can assist you in the most tax-efficient way to do it and comply with all laws.

Hedy Ghavidel

HEDY GHAVIDEL Managing Attorney  Roseville Office  1-866-471-6981  info@attorneysre.com Bio...

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