You are moving from your current home and want to gift it to a loved one like an adult child. It can’t be that hard, right? Gifting your home to a loved one can be trickier than you may think, but they are doable when researched thoroughly.
Tax Consequences of Gifting a Home
First, let us start off with what you and your loved one can expect when gifting a home. When you gift your home, you will have some tax consequences to deal with. For one, if the home is valued at more than $14,000, your loved one will have to pay what is known as a gift tax.
According to the IRS, a gift tax is “a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return.” This tax applies whether or not the transfer is meant as a gift or not. Also, if your loved one sells the home after they receive it, they will have to pay capital gains taxes.
Does Your Home Have a Mortgage?
If you haven’t paid off the mortgage on your home and gift it to a loved one, you will be subject to the mortgage’s due on sale clause since the mortgage won’t be transferred to the new owner. This clause will have a significant effect on whether or not the following methods are applicable:
Put Your Loved One on the Home’s Deed
This method may seem simple, but it comes with its own set of risks. For example, if you put your loved one on the deed and they have a judgement taken out against them for an unpaid debt, a lien can be put on your home. Adding your loved one to the deed is not recommended, but there are alternatives like a transfer on death (TOD) and revocable living trusts.
File a Quitclaim Deed
Another way to gift your home to a loved one is to file a quitclaim deed. With a quitclaim, you can transfer the property to your loved one and release yourself from interest in the property. Remember, quitclaim deeds do not release you from your mortgage obligations. You will still be responsible for making payments unless the new owner has assumed your mortgage.
Sell the Home to Them
While this advice doesn’t seem like it would be considered gifting, it is if you receive less than what the home is actually worth. When you sell your home, you could utilize an All Inclusive Trust Deed (AITD) with a wraparound mortgage. Here, the original loan is “wrapped” up with a second loan that the seller carries. Then, the buyer will make one large payment to the seller who splits the payment up between the lender of the original mortgage and themselves. As such, the original loan is preserved.
When gifting your home to a loved one, you will need to work closely with your lender, financial advisor, and lawyer to gain approval and make sure everything is in order and no one will suffer any unforeseen consequences.