What are the benefits of gifting property to family?
Gifting property to friends or family while you are still alive ensures that your property goes to who you want, when you want, and prevents fights over ownership down the road. Even when your intentions are clearly expressed in your Last Will and Testament, there can still be a challenge to your wishes in probate court. Probate challenges can create a costly headache for your heirs, and could lead to the forced sale of the home so that the proceeds can be split between a person's heirs. Gifting a home or property while you are alive can help prevent such challenges and expenses after you die.
There is, however, one large drawback to gifting property while you are still alive — taxes. While the gift is very likely to qualify under the unified federal gift and estate tax exemption amount, which in 2023 is $12.92 million, when a property is transferred after death, your heirs can see a massive tax benefit. Additionally, gifting a property could subject it to a tax reassessment. If you are considering gifting your property to a family member, ask a lawyer to explain the tax consequences first, and to discuss alternatives.
What are the different methods for gifting property to family?
There are several methods you can use to gift property to family members, apart from including it in your Last Will and Testament. Some of these include:
- Direct gift: Giving the property directly to your family member while you are alive makes it part of your $12.92 million (in 2023) unified federal gift and estate tax exemption, minus the $17,000 annual gift exclusion you also receive. This allows you to gift the property while you are still alive if you decide to move or for any other reason. You can usually make a Quitclaim Deed to transfer ownership.
- Bargain price sale: While this is not a gift in the traditional sense, selling for below market value, or just enough to clear the remainder of your mortgage, means the difference between the market and sale price becomes part of your gift exemption.
- Seller financed sale: If you're trying to help a family member buy their first home, and the one you want to give them is fully paid off, you may want to consider creating your own Mortgage Agreement. You can set up affordable monthly payments and modest terms. Should you die before the loan is paid, you may want to update your will to forgive the balance of the mortgage so it becomes part of your gift exemption.
- Joint tenancy: Joint tenancy names more than one owner of the property. If you enter into a joint tenancy agreement with two family members, then the property becomes their property in full when you die. However, this can create some tax penalties that you should understand.
- Living Trust: Creating a living trust allows your property and other assets you place in that trust to be distributed upon your death or when certain conditions are met.
Each of the above methods has advantages and disadvantages, and individuals interested in gifting property should get legal help before taking any steps to transfer their property.
Can I sell the property for below market value to a family member?
You can sell a property for below market value to a family member, or anyone for that matter. However, you need to do so carefully. Under current tax law, the difference between the fair market value and the purchase price becomes part of your gift exclusion. Remember that you get a $17,000 annual gift exclusion, but anything above that becomes part of your unified federal gift and estate tax exemption.
If you choose to sell the home in this manner, make sure you are doing so legally and follow state and local laws. You can complete a Grant Deed, or a Warranty Deed, to indicate that the property is yours to transfer, and file that deed with the local recorder. However, ask a lawyer about the legal requirements for your county or state to ensure that the sale and transfer are legal and everyone's rights are protected.
What tax issues arise from gifting a home or property?
After you pass, if you leave your home or property to a family member in your will and your estate does not exceed your unified federal gift and estate tax exemption, then, typically, there should be no tax obligation. The home's value at the time of the transfer is its current market value, so there are no capital gains taxes, and it will be exempt from estate taxes. Gifting your home or a property during your lifetime is different though.
If you gift a home prior to your death, the same unified federal gift and estate tax exemption applies, but the tax consequences are much different. In this case, a property may be reassessed, and the tax basis for the gifted home will be based on your original purchase price, which will mean more capital gains taxes. If you have legal questions about the process or potential consequences of gifting property, don't hesitate to ask a lawyer, as doing so may save thousands of dollars in tax liabilities and prevent costly mistakes.
Can I live in my home after gifting it?
There are a number of ways to gift your home to a family member while still having the right to live there. Setting up a joint tenancy, a life estate, or even creating a Living Trust can accomplish that goal. Setting up these arrangements, however, can be complicated, so it is best to ask for legal help if you plan to remain in your home after gifting it to a family member.
Fortunately, you can always reach out to a Rocket Lawyer network attorney to help you sort through any and all of your legal questions.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
