Transferring your ownership in real estate to a family member is an excellent way to cement your legacy. Through the gift of real estate, you are able to uplift relatives in need and give them a head start in life. Furthermore, you gain a sense of fulfillment knowing your life’s work is in the best hands.
However, the way you transfer property ownership to a family member does have consequences that you’ll want to consider before making the move.
Therefore, we’ll discuss how gifting real estate works, the costs you can expect, and the alternative methods out there to give a loved one the power of real estate without the financial tax.
Gifting real estate to a family member occurs when you transfer a home, apartment building, or any piece of real estate out of your name and into their name in exchange for nothing in return.
By definition, it is when you both completely change the title on the property deed and relinquish all property rights.
It’s important to note here that gifting real estate is very different from selling real estate to a family member at a loss. This type of transfer would be regarded more as a standard business transaction, with one exception: you would not be able to write off the loss on your taxes.
This is commonly why people that want to transfer property to a family member choose to formulate it as a gift.
Deeding a house, or transferring ownership to a family member, begins with identifying the recipient of the property. Once the terms and conditions have been agreed to, you will both complete and sign a change of ownership form, which will be filed with the local county recording office.
In addition, you will need to sign and notarize the proper deed and paperwork that your real estate attorney has drafted. Depending on your state, this may look like a grant deed, a gift deed, or other applicable property transfer documents.
The deed and change in ownership form are then filed with your local county recorder’s office. They will officially transfer the property out of your name and into that of your family member in the official records.
Gifting real estate becomes more complex, however, when the property you own currently has a mortgage. This is because most mortgages, especially those on residential property, have a ‘due on sale’ clause.
A due on sale clause typically states that if a property is sold or is otherwise transferred out of the initial borrower’s name and into another name, the lender can and will require full repayment of the remaining balance.
Certain lenders may be willing to allow your family member to assume the mortgage or take over the existing mortgage payments. However, this circumstance is rare. As a result, they may have to look into getting an entirely new loan to finance the purchase of the property.
There are also certain costs you can expect when transferring property into the name of a relative. Specifically, if the total value of the real estate that you give away exceeds $12.06 million dollars, you will have to pay a gift tax.
Under the rules of the IRS, individuals can transfer up to this amount of their wealth without being taxed as a way to allow people to pass on their legacy without exploiting the rule for tax evasion purposes. This means if you were planning to transfer a $15 million home to your granddaughter, you can expect a tax bill in the near future.
Additionally, at any point that your family member decides to sell the property in the future, they will owe a hefty capital gains tax. As an example, let’s assume you bought a home in 1980 for $90,000 and decide to transfer the property to your son and his wife on their wedding day. They live in the house for three years and then sell it for $500,000. Since they didn’t pay anything for the property, the IRS will recognize a gain of $410,000, which they will have to pay capital gains tax on.
As you can see, a gift of real estate can sometimes be a double-edged sword for both the donor and recipient.
From a tax perspective, gifting real estate can be more complex than it initially seems. Therefore, many choose to donate the property instead. Contrary to popular belief, there are ways to do so that allow you to still leave a legacy to your children or family members.
As a donor, you can execute a conservation easement to your property that allows you and your family members to avoid ever paying a capital gains tax in exchange for relinquishing the right to develop the property into more dense uses.
The intriguing part of conservation agreements is you are also able to take sizable tax deductions as well. These were designed to provide real estate property owners a method to preserve land for its scenic qualities and still gain a financial benefit.
You can also choose to leave your property to a Charitable Remainder Trust. These work similarly in that you can avoid a capital gains tax, a gift tax, and other estate taxes. Furthermore, your family member can receive monthly payments for the next 20 years from any proceeds that come from the sale of your property.
Through these avenues, your relatives can rest easy knowing you’ve taken the proper steps to ensure their future. This erases the potential of relatives facing a hefty tax bill.
Giving Property had the opportunity to work with a Florida attorney who was charged with helping a client decide what to do with his real estate in a way that would allow him to give back to the community while simultaneously benefitting his heirs. Through consultation, he decided to leave his restaurant, mini-storage units, and several small shops in the Disabled American Veterans (DAV) Charitable Service Trust.
With the help of Giving Property, the heirs were able to sell the portfolio of properties for $660,000, which benefited veterans in need and provided a sizable tax benefit to the estate.
To work with Giving Property to arrange the transfer of your property to a nonprofit, give us a call at 844-277-HOME or contact us through our form: https://givingproperty.org/contact-us.