How to Transfer Ownership of Your Home to a Family Member
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Many seniors have large homes they do not need in their older age. These seniors may have initially bought their homes to raise families. Many rooms that once belonged to other family members may now go unused. These larger homes often end up being burdens for seniors. Larger homes are difficult to maintain and are naturally more expensive as well. As a result, it is common for a senior to gift his or her larger home to a family member. Gifting a home is very satisfying for a senior, especially if he or she is gifting the home to someone who intends to start his or her own family.
Gifting a home is a generous gesture, but it can also be a complicated process. Seniors must take into account income and estate taxes before they can transfer home ownership to family members. There are several different ways to transfer home ownership to family members, some of which manage to avoid taxes. Seniors are strongly encouraged to consider all options to find the best possible way to transfer home ownership to family members.
Inheriting a Home
Some seniors choose to pass their homes onto their family members after they pass away. Transferring ownership by inheritance is more straightforward than some other methods. When the original homeowner passes, the tax basis for the home is altered to match the current fair market value. If the home is valued at less than $5.6 million, heirs inherit the home without paying any federal estate tax. It is important to note, that the issue of federal estate tax is currently being debated. Over the next few years, it is possible the estate tax will be entirely removed.
Gifting the Home
Seniors who plan to move out of their homes can gift the properties to family members. Attempting to gift ownership of a home is more complicated than inheriting a home. Current legislation allows seniors to deduct $14,000 of gifts from taxes. This deduction applies to each person receiving the gift. Many seniors gift houses to their children and grandchildren to increase how much is tax deductible.
There are two downsides to this method. The first is that whoever inherits the home will likely owe a higher capital gains tax at a later date. The second downside is that the senior uses his or her federal gift tax exemption. However, not all seniors use their federal gift exemptions.
Selling a Home
Instead of gifting a home to a family member, a senior may sell his or her house directly to the family member. There is a difference between selling a home to a family member and selling it to a stranger. Selling a home to a relative always counts as providing a gift. However, the gift amount is determined by taking the difference between the fair market value of the house from the actual sales price of the home.
For example, if a home is worth $500,000 and the senior sells it for $200,000, it will count as a gift worth $300,000. Seniors can deduct their annual gift tax exclusions to further reduce the costs. The total amount is compared against the current estate tax exemption, which is currently 5.6 million dollars. As long as the gift amount is under this total, a senior avoids the estate tax.
A senior must subtract his or her tax basis from the sale cost to determine the income tax. These losses are nondeductible. Seniors who experience gains can use the home sale gain exclusion to avoid paying taxes. For singles, the home sale gain exclusion applies to anything under $250,000. For a married couple, the exclusion is increased to include anything under $500,000.
Living in a Transferred Home
As they get older, many seniors need assistance from family members. These seniors often gift their homes to family members but continue to live in the houses so they can receive assistance. While this is a potentially valid scenario, the IRS considers it a gray area. One of the ways seniors can continue to live in their homes after transferring ownership is by renting the houses with the options to buy. Under this option, the senior continues to hold onto ownership while his or her family pays a rental cost. Once the rental costs reach an agreed upon sale price, ownership is transferred to the family.
Another option is to set up a qualified personal residence trust. A qualified personal residence trust is a more complicated procedure and comes with some risks. The senior places his or her home into a qualified personal residence trust. The IRS reduces the overall value of the house based upon several factors, including the length of the trust, interest rates and the age of the senior.
Once the IRS calculates a total, the total is reduced from the overall value of the home. The value of the home will not change once the number is set. When the trust ends, the senior may transfer ownership to a family member, but pay the family member rent to continue living in the house. The risk with this option is that the senior must outlive the trust. If he or she passes away before the trust expires, the full value of the home is included in taxable estate and the family receives no tax benefits.