Technically, the only way that you can always transfer assets, such as a home, tax free is to give them to a spouse. The Internal Revenue Service doesn't make provisions for other tax-free transfers of a home, even if you're giving it to another family member such as your child, parent or cousin. That being said, many home transfers don't have to be subject to tax.
You can gradually gift the ownership of your house to your child tax free. As of 2013, you can give up to $14,000 per year, tax free, to your child or anyone else. If you're married, you and your spouse can each give your child $14,000 for a total of $28,000. If your house is worth $280,000, you and your spouse will be able to give it to your child, 10 percent per year, over a 10-year period, tax-free. The annual gift exclusion changes periodically, so it's wise to check with the IRS.
Outright Gifting and Death
As of 2013, you can give up to $5.25 million in gifts ($10.5 million for a married couple) in life or transfers to heirs after death. In other words, you can use your estate tax exclusion to make gifts before you die instead of waiting to pass away. For instance, if you and your spouse want to give your $280,000 house to your child, you could subtract your $28,000 annual gift exclusion, and apply the remaining $252,000 to your gift tax exclusion to let the child take the house tax free. When you die, the $280,000 transfer would be deducted from your exemption.
Gifting and Basis
When you gift your house to your child, you also gift her your basis in it. If you bought your $280,000 house 35 years ago for $35,000, your child inherits the house with a $35,000 basis and may have to pay capital gains tax on it if she later sells it for a profit. If she sells it for a loss, the IRS will calculate the value based on the lesser of your original basis or the fair market value of the property when you gave it to her. This reduces the value of the loss. If your child receives your house after you die, the basis is stepped up to the home's fair market value on the date of your death. (ref 3)
Fair Market Sales
Another way to transfer your house tax free to your offspring is to sell it to her. To avoid gift tax or the need to use your exclusion, you'll have to sell it at a fair market price -- a significant discount is considered to be considered a gift. If you finance the house for your child, the loan will have to be at or above what the IRS considers to be a fair market interest rate -- the IRS' rate is usually competitive relative to what your child will get in the market. Also, while your child will be able to deduct the interest he pays you, you will have to pay tax on the interest.
Just because you don't have to pay federal gift taxes when you transfer ownership of your house to your offspring doesn't mean that the transfer will be tax free. You may need to check with your state or county to see if any transfer tax will be due when you record the deed. Some states exclude gifts from taxation, while if you sell your house to your child, you are much more likely to have to pay the transfer tax.
- IRS: What's New - Estate and Gift Tax
- Law Office of Erik Holt: Gifting and the Gift Tax
- 360 Degrees of Financial Literacy: What Is the Basis of Property Received as a Gift?
- Wiseman Bray Attorneys At Law: Law FAQ: Can I Sell My House to My Children for $1 to Avoid Gift Tax?
- CNN Money: Become Your Kid's Mortgage Lender
- Nolo: Borrowing From Family and Friends to Buy a House
- Sacramento County Public Law Library: Documentary Transfer Tax
- Stewart Title: Deed Stamps and Exemptions
- Nolo: The Federal Gift Tax
- PayTaxesLater.com: Understanding the Step-Up in Basis Rule
- David Sacks/Photodisc/Getty Images