If you're thinking about transferring your home to your child, you may want to do your research. That's because there are some administrative and financial considerations you may want to weigh out before you make the move.
The costs associated with a title transfer vary by state and by how the transfer is accomplished. Filing a deed yourself may be the cheapest method, but it requires quite a bit of homework to ensure you fill out and file the appropriate paperwork correctly.
Online legal document centers, such as LegalZoom, offer deed transfer services for around $250, plus filing fees. These services typically include title research, creation of the real estate deed, and filing of the deed with the county recorder's office. You can also hire a real estate attorney to execute the deed transfer. This might be the most expensive option, but it may also be the least stressful since you will be certain the transfer was executed appropriately.
- Filing a deed yourself might be inexpensive but requires being informed.
- Hiring an attorney might be expensive, but also less stressful.
- Transferring property could cost more than leaving it as an inheritance.
Costs of Tax Consequences
Tax consequences of selling a property to a child can end up costing them more money than if they were to inherit the property later.
Let's assume you originally purchased your home for $50,000 and put $20,000 into the home over the years. It has a current market value of $250,000. Because you transferred the home to your child while you were still living, your cost basis of $70,000 becomes your child's basis.
If your child sells the home, they would owe capital gains taxes on the difference between the sale price and the cost basis, which would be $180,000. At a capital gains rate of 15%, that would equal $27,000 in taxes. The tax rate would be higher if you owned the home for less than one year, at which point the profit would be taxed as ordinary income.
If your child moves in and lives in the property for at least two out of five years before selling it, up to $250,000 of profit can be excluded, and $500,000 can be excluded if filing jointly with a spouse. Your child will have to use your cost basis of $70,000, which includes the $50,000 purchase price, plus the $20,000 in improvement costs.
When a parent transfers the title of the home to a child without receiving valid consideration, this is considered a gift. Gifts in excess of the annual exclusion rate must be reported to the IRS, and the donor will be subject to gift taxes.
Transferring Title vs. Inheriting
If your child inherits the property upon your death instead of you transferring the deed to them, the child will receive the stepped-up basis, where the value of the property on the date of your death becomes the child's basis. So, if the property has a market value of $250,000 at the time of your death, your child could sell the home for $250,000 and not be responsible for capital gains tax.
Suggestions were floated to modify the stepped-up basis rule in the future. This includes changes that were proposed by the Biden Administration that would eliminate the stepped-up basis altogether. Since tax rules do change, it is important to consult with a qualified tax specialist before making any decisions.