Owning a home can become harder with age.
For this reason, some elderly people sell their properties and downsize to smaller homes.
But instead of selling your home, you might transfer ownership of a house to a child, maybe as an early inheritance.
In most cases your child will appreciate this gift, and this approach keeps the home in the family.
This isn’t a decision to take lightly.
You must take account of the consequences of this decision, and then consider whether this is the right move for everyone involved.
Is Giving the Home to a Child in Your Best Interest?
If you’re tired of the upkeep that comes with owning a home, signing over the property to a child might seem like a fitting choice.
Keep in mind:
When you transfer complete ownership of a home to someone else, you’re no longer the legal owner.
And if you continue to live in the home with your child, they can technically evict you, although this is unlikely.
Also, you’re not only gifting the actual house, you’re also gifting your equity.
If you’re able to live off of your retirement income comfortably, you might argue that you don’t need proceeds from a home sale to stay afloat.
But just because you don’t need the money today doesn’t mean you won’t need it in the future.
Maintaining ownership of the home and keeping your equity serves as your safety net. You’ll lose this cushion if you give the home to your child.
Ultimately, it’s your decision.
Speak with a financial advisor before proceeding with the transfer. They can provide advice and guidance on protecting your financial interest.
It might be wiser to rent out the house to a child.
Or perhaps add your child’s name to the mortgage deed and share ownership. In the event of your death, your child takes full ownership of the property.
Tax Consequences for You and Your Child
Make sure you fully understand the tax consequences of transferring ownership of your home to a child.
Because you’re giving something of value and getting nothing monetary in return, the Internal Revenue Service (IRS) will view the transfer of property as a gift.
Therefore, you could end up owing gift taxes.
Gift taxes are paid by you, the donor, not the recipient.
In 2018, you’re allowed to gift $15,000 per person without owing a gift tax. Since the value of your home is likely more than this amount, you’ll have to file a gift tax return.
But just because you file a gift tax return doesn’t mean that you’ll pay taxes on the amount of the gift. You can pay the gift tax in that tax year, or subtract it from your lifetime gift tax exemption.
Currently, the lifetime exemption is $11.2 million.
If you choose the latter, you’ll only pay a gift tax if the total value of your gifts exceed this amount. Filing a gift tax return is how the IRS keeps track of your financial gifts.
But even if you’re off the hook for the gift tax, your child might be responsible for paying capital gains tax.
The sad reality is that many people wind up paying real estate taxes when they’re gifted a property.
The amount your child might owe in taxes is based on the original cost basis of the property. This is what you paid for the property, plus any adjustments for major improvements or depreciation.
To illustrate, let’s say your house is worth $200,000 when you transfer it to your child.
And let’s also say you originally paid $100,000 for the house, spent $20,000 on improvements, and never claimed depreciation. In this scenario, the cost basis is $120,000.
If you child sells the home for $200,000, they would pay capital gains tax on $80,000.
The good news is that your child can avoid this tax by residing in the home for a certain length of time.
As long as they own and live in the house for two of the five years before selling the property, they don’t have to pay capital gains on the proceeds.
The exemption is up to $250,000 if single, and up to $500,000 if married and filing a joint tax return.
How Will This Decision Impact Your Child’s Finances?
Although you might love the opportunity to transfer ownership of a house to your child and leave them with a valuable asset, consider how this decision may impact their personal finances.
They won’t have to worry about a mortgage payment if you’ve paid off the property.
But at the same time, your child should be in a financial position to afford property taxes, homeowner’s insurance, HOA fees (if applicable), and home maintenance.
Be realistic with regard to their financial ability.
Also, consider whether your child is responsible enough to manage a home. A paid-off home is an excellent gift. But if your child isn’t financially savvy, they might be tempted to refinance and needlessly pull cash out of the property.
It’s their home and their decision.
But if your child has a history of making poor choices with their money, they could potentially borrow more than they can afford to pay back, which puts them in jeopardy of losing the home you worked for.
If you still owe a mortgage on the property, it is possible to transfer ownership and keep your name on the mortgage loan. In this situation, your child might agree to take over the mortgage payments.
Before moving forward with the transfer, make sure you have a candid discussion about their finances to make sure they can manage the mortgage payment, and other expenses that come along with owning the home.
How Do You Transfer Ownership: What Are the Steps?
If you decide that giving the home to your child is the right decision, here’s how to proceed:
Contact your mortgage lender
If you want to transfer ownership of a property but retain the mortgage in your name, contact your lender to see if they’ll allow the transfer.
You can proceed with the transfer without contacting your bank. Just know that you could run into problems if the financial institution discovers the transfer.
Mortgage lenders have to protect their interest, which is the property that secures the loan. And oftentimes, mortgage loans include a “due-on-sale” clause which gives a lender the right to accelerate a loan if the property transfers ownership.
In other words:
Any remaining balance must be immediately paid in full.
Complete a quitclaim deed
A quitclaim deed is a document that transfers ownership of a property from one person to another.
Contact an attorney to prepare this deed.
You have to include your name as well as the name of any other owners, such as a spouse.
You’ll also include your child’s full name and the property address. To finalize the transfer, sign the deed in front of a notary public.
Pay recording fees and taxes
Real estate deeds are filed with the county clerks/recorder’s office.
You’re responsible for paying the fee to record the new deed. Once the clerk’s office records the deed, your child receives the original.
Also, be prepared to pay a real estate transfer tax when you bring the deed to the county clerks/recorder’s office. Depending on where you live, transfers between a parent and child might be tax exempt.
Other Alternatives to Consider
Then again, you might decide that giving the house to your child isn’t the right move.
It might be better to sell the home.
This is an option if your child isn’t in a financial position to maintain the home, or if they don’t want the property. After the sale, you can give all or some of the proceeds to your child as a gift.
Add to the deed
Add your child’s name to the deed, but don’t transfer complete ownership.
This can work if you still owe a mortgage on the property and your mortgage company won’t allow the transfer. By doing so, you’ll share ownership. In the event of your death, they can either sell or retain the home.
Use a trust
If giving the home away isn’t an option, another strategy is putting the home in a living trust.
You’ll put the house in a trust before you die, and upon your death, this asset passes to your beneficiary. Speak with a lawyer to complete this process. You’ll need to prepare a new deed in the name of the trust.
Your house is your biggest asset. And naturally, you want it to end up in the right hands — which is in the hands of your child.
But while this is one of the greatest assets you can gift, make sure it makes sense for everyone involved. Consider the benefits as well as the consequences.
If you need additional guidance, speak with your attorney or financial advisor.