Giving your home to your children can have tax consequences

Many people wonder if it’s a good idea to give their home to their children. While it’s possible to do this, giving away a house can have major tax consequences, among other results.

When you give anyone (other than a spouse) property valued at more than $13,000 in any one year, you must file a gift tax return.

You won’t owe any federal gift taxes if the total value of your gift, in addition to any previous gifts over the $13,000 limit, is under the exemption amount. That amount is about $5 million in 2012, but it’s scheduled to be reduced to $1 million next year. The Connecticut gift tax exemption is also $1 million. However, even if you don’t owe any gift taxes, your gift might affect the estate tax that will be owed when you pass away.

Also, if your children sell the house right away, they may be facing steep capital gains taxes. The reason is that when you give away your property, your tax basis in the property becomes the tax basis for the recipient. For example, suppose you bought your house years ago for $150,000, and it’s now worth $350,000. If you give your house to your children, their tax basis will be $150,000. If they sell the house, they will have to pay capital gains tax on the difference between $150,000 and the selling price.

In general, the only way for your children to avoid the tax 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 (or $500,000 for a married couple) of their capital gains from taxes.

Inherited property doesn’t face the same taxes as gifted 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 would remain in your estate, which might have estate tax consequences.

Beyond the tax implications, giving a house to children can affect your eligibility for Medicaid. You could also run the risk of losing the right to live in your home if the child you give it to predeceases you, gets divorced or gets sued. 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, contact us and we can advise you on the best method for passing on a home.

Attorney Robert A. Scalise Jr.