Can you transfer a home to your children and avoid estate taxes on the home?

Question

My father would like to transfer his home to me, and avoid having it added to the total value of his estate. Will this work? Or, will I end up adding it to the total value of his estate?

Answer 1

He cannot avoid a large gift from becoming part of his estate tax return, even if he gives it to you.

The estate tax and the gift tax are combined at death.  This means effectively that if your father gives you the house, the value of the house at the time of the transfer will be included in his estate.  He may owe gift tax when he transfers it to you, but this will be reconciled with the estate tax return and the estate will get credit for gift taxes paid.

If he does not give you the house but owns it when he dies, the value at the time of death is included in his estate.  

In addition, you as heir would probably stand to benefit by inheriting the house rather than receiving it as a gift.  This is because your basis of the gift is usually the basis of the donor.  In contrast, your basis of inherited property is the value at the time of inheritance.  So, you stand to pay less capital gains tax when you sell it.

Taxwise, the decision  to transfer now or not depends on the size of the estate, the original value of the home, present value of the home, and the anticipated value of the home, your tax bracket, and whether the home will be your principal residence and qualify for the exclusion of gain when you sell it.

So, consult with an estate attorney before proceeding.

Answer 2

it would follow the same rules as selling your home and taking the gain tax free.

Meaning he would transfer the house and you would have to own it for 2 years before he passed in order to have it not included in the estate.

Make sure his name is NO where on the new deed/mortgage app, etc.

Answer 3

The IRS is smart.  If your dad 'gifts' you the house, but continues to live in it, pay all the bills, etc, it won't have a completed gift...and the house would still be part of the estate.

Even if he does complete the gift, the value of the house is put on the gift tax form and at death, the value of the estate INCLUDES the taxable gift.  The gift tax credit is a combined credit with the estate.  The problem is, you would wind up with a basis based on his basis (plus most of the gift tax he paid if he's already past the $1M in lifetime gifts).  The estate would use the FMV, you would get the capital gains bill.

Answer 4

He could wind up paying taxes now and you will definitely incur a tax liability.  Best to wait until his death and handle it as part of the overall estate, where you will probably have the lowest tax burden.

Answer 5

See a estate attorney before you do anything.

Gifting a piece of property before passing is generally the worst thing to do.  You may save on estate taxes but you may end up paying income taxes.

"Gifts" are valued to the receiver for income tax purposes at whatever the giver paid for it.  If you turned around and sold the house right away you would owe taxes one the difference between what you sold it for and what he originally paid.

"Inheritances" are valued to the receiver for income tax purposes at the fair market value as of the date of death.  If you sold the house right away, chance are all of the proceeds would be tax free.  Plus, the current estate tax exemption is $2 million.  

Like I said, don't do anything without consulting a professional first.

Answer 6

That depends on a variety of things.  Assuming that he'd be giving you a gift of over $12,000, he'd either pay a gift tax now or have the amount of the gift essentially added to his estate when calculating if any estate tax is due.  And at such time as you sell it, your basis would be whatever your dad's was if he transfers it to you - if you inherit it, your basis would be whatever it was at the time you inherited it - so you could end up paying more taxes that way.

If his estate is large enough to owe estate taxes, he should consult an accountant who specializes is estate planning.