We are accountants in Chicago and would like to give you our opinion regarding gifting you house to you children since many of my clients have asked me this question.
Giving / gifting you house to your children can have major tax consequences. Many people wonder if it is a good idea to give their home to their children, of course they can do that but this won’t dismiss the tax implication on such a transaction.
When you want to give a property as a gift (valued at more than $13,000 in any one year), you will have to file a gift tax form. And under current law you can gift a total of $5 million over your lifetime without incurring a gift tax. If your residence is worth less than $5 million, you likely won’t have to pay any gift taxes, but you will still have to file a gift tax form. (And Congress may change the gift tax exemption, which is now scheduled to revert to $1 million at the end of 2012 unless Congress acts.)
You may not have to pay gift taxes on the gift, but if your children sell the house right away, they may be facing steep taxes. The reason is that when you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. For example, suppose you bought the house years ago for $250,000 and it is now worth $450,000. If you give your house to your children, the tax basis will be $250,000. If the children sell the house, they will have to pay capital gains taxes on the difference between $250,000 and the selling price. The only way for your children to avoid the taxes is for them to live in the house for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.
Gifted property does not face the same taxes as inherited property. If the children were to inherit the property, the property’s tax basis would be “stepped up,” which means the basis would be the current value of the property. However, the home will remain in your estate, which may have estate tax consequences.
As a Tax Preparer, who has prepared thousands of tax returns, I can say that there are different consequences while gifting a house to your children and it can affect your eligibility for Medicaid coverage of long-term care. There are other options for giving your house to your children, including putting it in a trust or selling it to them. Before you give away your home, consult your elder law attorney, who can advise you on the best method for passing on your home.
Please contact us at 773-728-1500 if you have any questions related to Income tax.