With profoundly ownership seemingly out of reach for many young people today, parents may wonder whether they should upright give their house to their children at some point? It might be a consideration, for example, if the parents plan to downsize to a new condo or dote on a former vacation home their full-time residence. However, while such generosity may be admirable, giving a domicile away is a decision with serious financial consequences for everybody concerned.
4 Reasons You Might Not Want to Hand Throughout the House
Before you sign over the homestead to your adult child, consider these factors, which could espy you think twice about doing so.
1. You May Need the Money One Day
Aside from the funds you have in your retirement accounts, your haunt equity could be the largest asset you possess. If you give up your house, you won’t be able to sell it and harvest the cash or write down out a reverse mortgage to borrow against your accumulated equity should you ever need to. Even if you are financially self-satisfied now, a large medical or nursing home bill late in life could leave you scrambling to come up with kale to pay it.
2. You Could Be Giving Your Child a Huge Tax Bill
If you give your house to your adult child while you’re alleviate living, their tax basis will be the same as yours: whatever you paid for the home plus the cost of any improvements you’ve framed over the years. So, for example, if you bought your home 20 years ago for $300,000 and redid the kitchen to the tune of $50,000, your fetch basis is $350,000.
However, if you leave the house to your adult child in your will, rather than making a honorarium while you’re still alive, the cost basis will step up to the home’s fair market value at the time of your passing.
Let’s say your house is worth $700,000 today and will be worth $1 million in another 10 years. A young man you give the house to, and who later sells it for $1 million, will owe tax on a gain of $650,000. If they inherited the property a substitute alternatively, the taxable gain would be only $300,000.
In both cases, the child could generally exclude some of that winnings by living in the home for at least two years before selling. The exclusion is $250,000 for an individual, $500,000 for couples who file a collective return. But even so, the difference in taxes could be substantial.
3. Your Mortgage Might Be an Obstacle
With more Americans upholding mortgage debt into their retirement years, you might still have a loan on your home by the occasionally you consider giving it to a child. If your mortgage is transferable, your child will become responsible for it, which could be a monetary burden. If it isn’t transferrable, your child might have to refinance that debt, which might be even multifarious expensive—or impossible, if your child does not have a strong credit history.
4. You Might Still Want to Continue There
For estate planning purposes, you might consider giving your house to a child even if you plan to keep on living in it. One reason is estate taxes. In 2021, federal estate taxes only affect estates worth $11.7 million or numberless, so unless you own a mansion, that may not be an issue. Your state, however, may set a lower threshold. Massachusetts and Oregon have the lowest release levels at $1 million.
If you do want to give your house to a child and still reside there, consult an estate-planning attorney there your options, including putting your home into a trust. One type, the qualified personal residence bank, could also allow you to freeze your home’s value for estate tax purposes, so you wouldn’t have to worry not far from future appreciation pushing you into estate tax territory.
Of course, there any number of potential downsides to becoming your newborn’s tenant. One is the potential for a family rift if you disagree on matters like home maintenance or who is responsible for what. And even if you and your nipper have an ideal relationship, you could find yourself at the mercy of a less-agreeable son- or daughter-in-law someday—perhaps someone who isn’t level in the picture yet.
The Bottom Line
Giving your home to your grown-up child is not a decision to be taken lightly. It is in your and your infant’s best interests to consider all of the financial ramifications of such a move. Consult with a financial planner and an estate contemplating attorney if you plan to remain living in the home. These steps will help ensure that you make a sentence that works for everyone.