With today’s home prices and the crazy real estate market, it’s likely difficult for your children to buy a home. And it’s conceivable that you are ready to move on from your existing home.
If this is true, consider the three options below for transferring your home to your adult child.
Option 1: Make an Outright Gift
Say you’re feeling so generous that you might just simply give your home to your adult child. What a deal for the kid!
If you expect the home to continue to appreciate (seemingly a pretty good bet), getting it out of your estate by giving it away is a good estate-tax-avoidance strategy.
Option 2: Arrange a Bargain Sale
Say you’re feeling generous, but not so generous that you want to simply give away your home. Fair enough.
Consider selling the home to your child for less than fair market value. For federal gift tax purposes, this is treated as a gift of the difference between the home’s fair market value and the bargain sale price. Tax-wise, this can work out okay.
Warning. Do not make a bargain sale or an outright gift of the home if you intend to continue living there until you depart this planet. In these scenarios, expect the IRS to argue that the home’s full date-of-death fair market value must be included in your estate for federal estate tax purposes, even if you were paying fair market rent to your child.
Option 3: Arrange Full-Price Sale with Seller Financing from You
The idea of giving your home-starved child a big free lunch might be unappealing. Very well.
Consider selling or transferring the home to your child for its current fair market value with you taking back a note for a big part of the purchase price.
Assume you’re feeling charitable. If so, you can charge the lowest interest rate the IRS allows without any weird tax consequences. That’s called the “applicable federal rate” (AFR). AFRs change monthly in response to bond market conditions and are generally well below commercial rates.
If you would like to discuss transferring your home to your adult child, please contact us today.