Multigenerational multiracial family gathering at gifted home.

How To Gift A House To A Child, Friend Or Family Member

Da'Vonne Duncan7 minute read
September 18, 2021

Gift-giving just got bigger and better.

With endless memories and sentimental value, it can be tough picturing someone else living in your family's hearthstone. That being the case, you may have questioned if you can gift a house to someone. Although it’s possible, the task isn’t as simple as your friends or family moving in once you pass or decided to downsize. And you can thank estate and gift tax for that.

Gifting a property or buying your parents’ home doesn’t have to be an annoyance. We researched tax consequences your loved ones can face and FAQs to help you navigate your options.

Can You Gift A House To Someone?

It’s not uncommon for people to pass down real estate to family members or organizations. Typically, after death, people want to their share their wealth by giving a generous gift. There are many strategies to gift real estate to someone you love, all of which come with their own set of tax implications. In 2021, a gift of equity above $11.7 million, will be taxed whether you sell your home to your child for $1 or below market value. Below are reasons you may want to consider gifting real estate.

  • Bad credit: When it comes to giving someone a house, the beneficiary’s credit score would not be a determining factor, since the person receiving the house doesn’t have to qualify. Ultimately, you do not have to be preapproved for receiving a gift. This option is ideal if the recipient has a poor credit
  • Increasing exemption amount: Since 2018, the estate tax exemption amount has been trending up. This means that you can gift property and still avoid estate tax if the amount equates to $11.7 million or $23.4 million since couples can give matching gifts. Therefore, now is the perfect time to gift a house.

Now that we discussed the benefits of gifting a home to someone, let’s talk about legal transfers of property. The process of transferring ownership to another person is called conveyance, which comes in the form of a title, deed or lease to make the transfer official.

Tax Implications Of Gifting A Home

In 1916, estate taxes were established to tax the income of affluent taxpayers. Policymakers noticed the inheritance of wealthy heirs would normally not face any taxation, which influence the creation of the estate tax. Depending on how you gift your home tax implications may appear for each gifting strategy, which will be discussed in-depth later.

You know your dream home.

We’ll help you find it.

How To Gift A House To Someone

If you own your home, you have the right to gift that property to whoever you like. However, if not done properly the IRS is going to want in on the deal. Always consult with a real estate agent or attorney in every real estate transaction to guarantee you are taking the right steps to avoid unnecessary tax implications. Continue reading to discover tax considerations and detailed explanations that will help you decide which method you prefer to gift a house.

Let’s say your property has a fair market value of $350,000, we’ll go over possible tax implications and deductions in each scenario.

1. Buy A Home For Them

If you’re fortunate enough to purchase a home for someone, know that it is possible and there are several ways to achieve this.

  • Buying a house with cash: After you purchase the home, make sure the deed is in the recipient’s name. This will give them full responsibility for the property and taxes and gives them the freedom to do what they wish with the home, such as renovating.
  • Investment property: If you plan to purchase a house for someone with a mortgage, it will be considered an investment property since you won’t be living there at all. Please be advised this method comes with higher interest rates and down payments, compared to primary properties.

Tax Implications

Buying a home for someone will exceed the annual gift tax exclusion of up to $15,000. For that reason, the IRS will prompt you to file a 709 form. Despite, a lifetime exclusion of $11.7 million or $23.4 million for couples, you will have to report gift tax and real estate over $15,000 to the IRS against your lifetime exemption. However, the recipient of the property doesn’t have to report the gift to the IRS, meaning their income tax will not be affected. When the gift-giver wants to pass the exclusion rate, they can expect to pay 18% – 40% in a gift tax.

When it comes to gifting a home, the tax implications are for the donor. The receiver of the gift doesn't need to worry about taxes. For example, if they exceed the lifetime exemption, the donor pays the taxes and the receiver will not be held liable.

Another way to help a loved one in the process of closing on a home is through a gift letter, which includes the donor's information, the recipient's information and the gift details. It’s no secret that buying a property can be expensive – down payment costs can be up to 20% of a home sale price. You can offer to pay for fees with no expectation of repayment through written proof, known as a gift letter. This will help the lender understand the source and purpose of the funds given to the receiver.

In the example below the gift tax is 20% and the fair market value of a house is $350,000, keep reading to see how the giver is impacted.

Fair market value: $350,000

Taxes owed: $70,000

2. Sell Your House To Them On The Cheap

Selling your home to a friend or family member is going to be slightly different from selling your property to a stranger. Instead of an arm’s length transaction, both parties will participate in a controlled transaction. According to financial writer Sam Hawrylack, a controlled transaction is “a deal that involves two people related to each other.” The IRS will be monitoring closely to determine if the price of the home meets fair market value or is considered a gift.

Tax Implications

If selling the home below fair market value through a gift of equity, you must report the transaction to the IRS as a gift if it exceeds $15,000. The seller may have to pay a gift tax if the gift of equity surpasses $15,000, subject to the lifetime exclusion limits mentioned above for gift and estate tax. They may also be subject to capital gains tax depending on how long the gift-giver had the property and its value. Let’s look at an example below if your gift your child a property $100,000 below the fair market value and the tax rate is currently 15%.

Fair market value: $350,000

Sale price: $250,000

Taxes owed: $37,500

3. Give Your Home To A Charitable Organization

Gifting a property is beneficial not only to the charity but to you. The biggest advantage is a hefty tax deduction that can be up to 60% of your income. Certified public accountant Chris DiLorenzo mentioned that the value of your home when you first purchased it could be the amount of the tax deduction. On the same note, if your deduction is based on the current value of your home, your deduction will be limited to 30% of your income.

Tax Implications

Since you would be making a generous contribution, tax consequences will be scarce. Reassigning the property to a charitable organization, instead of selling it to someone else will eliminate the home from your estate. Therefore, estate taxes will not be a concern for the gift-giver. Most importantly, if your property is being gifted on an appreciated basis (the current value of your home) and not the cost basis (the value of your home when you first purchased), you’ll have the opportunity to avoid capital gains tax.

Be sure to consult with a tax advisor throughout this process.

Appreciated basis: $350,000

Tax deduction: $105,000

Gifting Property FAQs

Can I sell my house for $1 to a friend?

Can you gift a house to a friend for $1? The brief answer is yes! If you are the owner of the property, you can sell your home to whoever you like at any price. However, make sure you read through all the restrictions to take the best course of action.

Often, people assume that selling their house to their loved ones will help them avoid taxes in the future. Although gifting real estate can be beneficial, the Internal Revenue Service created federal gift tax and estate tax implications on how you give property. According to the IRS, an estate tax is a tax on your right to gift property. Here's how it works: the amount of everything you own is calculated into a net amount, then that number is added to the number of taxable gifts you have, which creates an estate tax.

The good news is small-scale properties don’t require filing for an estate tax return. Then again, if the gross estate amounts to anything over $$15,000 in 2021, filing is required since the net total surpasses the exemption amount.

Can I buy my parents’ house to avoid inheritance tax?

There are no federal inheritance tax laws. Only six states impose the inheritance tax: Iowa, Kentucky, Pennsylvania, New Jersey, Maryland and Nebraska. Hence, where the deceased person lives matters. For instance, if you live in New Jersey and your distant relative in California receives money after your passing, then they will have to pay an inheritance tax.

Inheritance taxes vary by state and typically don't affect immediate relatives, only distant ones. Be sure to get in touch with a tax professional or research your state’s department of revenue.

How Do You Transfer A House With A Mortgage?

Transferring a house with a mortgage is achievable, but you may face some challenges since your property is supposed to secure the loan. The mortgage must have a clause that allows someone to assume responsibility for the remaining amount. Following this, the lender must approve of the new borrower and reassignment. If this method does not work out, there are still other options. If the lender is unable to approve the transfer, the new homeowner can take out a loan on their own, meaning the former owner will be responsible for paying the rest of the balance.

In addition, loans will typically have a due-on-sale section, meaning the lender can make the remainder of the loan due upon the closing or gifting of a property.

The Bottom Line: You Can Gift Property, But Should You?

Whether you want to gift your house to a friend, loved one or charitable organization, it’s possible. Gifting a property comes with various benefits for the recipients, and yourself if your estate gross net is below the tax exemption amount. Always remember to take the time to contact a real estate agent, attorney and tax advisor about implications before moving forward.

Now that you know you can gift property, dive deeper into special considerations when it comes to selling a property to a family member.

Table of Contents

    Da'Vonne Duncan

    Da’Vonne Duncan is a Blog Writing Intern, covering lifestyle topics for the Publishing House. She has a passion for words and enjoys writing scripts, blogs, narratives, and poetry. She holds a bachelor’s degree in Mass Communications with a concentration in digital video production, from Delaware State University.