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Although there are no tax deductions for giving gifts, even to your children, should you decide to give your home to your offspring, there could be tax consequences. You can legally avoid some tax implications if you plan properly. However, just as no good deed goes unpunished, gifts of real estate can be costly acts of generosity without careful tax planning. Before gifting your home, consider the potential tax implications.
Federal Gift Tax
When you give something of value without getting something of equal value in return, you've given a gift. Taxpayers giving gifts attract IRS attention because of gift tax regulations. Individuals are permitted to gift up to $13,000 per year tax free. If you're married, each of you can give up to $13,000, totaling $26,000 per year without gift taxes due. However, in most cases, gifts of real estate greatly exceed these tax exclusions.
Capital Gains Taxes
Although offering better tax treatment than for ordinary income, capital gains taxes come into play if you give your home to your child and he sells it in the future. Should the child occupy the home -- and never sell it -- potential capital gains taxes, which could be significant, will not apply. However, upon the sale of the home, capital gains taxes are due on the difference between the cost basis and the selling price of the home. When you gift a home to a child, the basis is the price you paid for it, not its value when you gifted it. This can amount to a large gain on the sale and many tax dollars due.
The federal gift tax and estate tax are integrated into one unified system. The lifetime exclusion for both gift and estate taxes is $5.12 million. You can use this exemption, called the "unified credit," to avoid gift taxes should you give your home to your child. However, depending on the value of your home and the size of your estate, you may be putting your exemption at risk.
Along with generating no tax breaks, gifting your home to your child can generate additional tax consequences, while losing some common deductions. For example, you technically no longer have property taxes. Your child is now responsible for real estate taxes on your home. The accompanying real estate property tax deduction also belongs to your child. If you have a mortgage, you'll also technically lose the interest deduction. Be careful. Only give your home to your child upon the advice of an experienced tax professional to avoid nasty tax surprises.
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