Gifting Your Property? What Taxes to ExpectShare this post
Gifting Property-What to Know
Currently, lower estate prices make it a great time to gift a home to your children. This allows them to obtain the property now, which it’s still valued low, and benefit from its increased value, as the market improves. If this sounds like an attractive plan for you, visit our experienced Chicagoland estate planning attorneys to learn about gifting property.
Tax laws can influence how you follow through with a plan to gift your real estate to a family member or friend. Experts in estate planning, such as those at Anthony J. Madonia & Associates, can explain the tax laws regarding this type of transaction. Depending on the options available in your specific situation, you may even be able to benefit from tax incentives.
One option is for the parent to act as the lender, requiring the children to pay off the remaining mortgage. In this case, the income tax charged to the parents for the sale of the home is deferred, while the recipients pay off the balance. For the children, this situation is also advantageous, because the parents can offer a lower interest rate than those offered by traditional banks.
However, the balance of the mortgage may be charged a sales tax, requiring the parents to pay that instead of income taxes. According to IRC 121 of the federal tax code, a married couple can be exempt from income taxes on up to $500,000, so that may apply to the situation. Experienced estate planning attorneys in Chicago can provide the terms of following this route in greater detail.
If the parents simply allow the children to take on the mortgage payments, the IRS will view this as a gift/sale arrangement. If the home is valued at $1 million in this situation and $300,000 is still owed on the mortgage, the parents will likely have to pay an income tax on $700,000. Alternatively, the parents may gift the house to their children, while continuing to pay the mortgage themselves. While this is possible, it requires the permission of the lender.
In this case, the parents will have to file a gift tax return form, though they may not have to pay taxes on the transaction. Married parents get a lifetime exemption of $5.45 million and an annual exemption of $14,000 in gifting to their children. Anything over the $5.45 million will be held against the state tax exemption.
Gifting Property-What Questions do you have?
For your specific situation, our Chicagoland estate planning attorneys can give you a more detailed assessment. Contact Anthony J. Madonia & Associates for a consultation. This can help you gain a better understanding of these laws and learn how they apply to your plans.