Want to gift your home to your adult child tax-free? Experts say plan ahead

The transaction can come with some red tape, but planning ahead can make it easier

Although the tide is beginning to turn, until recently, homeownership has been on the laundry list of things millennials have been credited with killing. (Also looking at you: napkinscanned tunabar soap and Applebee's).

Last year, only about 1-in-3 millennials younger than 35 owned a home, according to census data, which is down 8% from baby boomers when they were that same age.

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The trend has been a source of consternation for those in the housing industry, but its not without explanation. One report from the Urban Institute points to everything from rent costs in urban areas to student debt as barriers to buying.

"A lot of people who would have been homeowners before are not owners today," Brad Dillman, with the Atlanta-based Cortland Partners, told the AJC last year.

And even though average rent costs in Atlanta increased by nearly 5% last year, according to one analysis, home prices in the city have continued to outpace that.

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The median price of a home in metro Atlanta earlier this summer was $260,000, which is up 86% from 2012, the AJC has previously reported. However, that surge has come back down a bit again recently.

In response to the housing crunch, some millennials have looked to their parents for assistance: Everything from help with rentliving at home longer or even, in some cases, parents have bought their adult children a home.

However, if parents want to help their adult child by gifting them their own home, it can come with a fair amount of red tape. In order to get the best tax results, experts recommend planning ahead.

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According to a recent report published by MarketWatch here are some of your options for passing on your home to the next generation:

  • Stay in your home as long as possible: If a parent lives in their house until they die, the home can be gifted in an estate (assuming the unified estate is below the federal estate gift and tax exemption amount ⁠— $11.4 million this year). This gives heirs the option to move in or to sell the property without having to hand over a hefty wad of cash in federal taxes. 
  • Put a bow on it: You can always pass on your house as an outright gift immediately. However, it could cost you long term. This option will likely require that you'll dip into your unified federal gift and estate tax exemption, which is "reduced dollar for dollar by gifts in excess of the $15,000 annual exclusion amount," according to MarketWatch. This option will also likely stick your child with capital-gains tax on a later sale, since the taxes will be based on the likely low cost of the property.
  • Flip the script and become the renters: Once you gift your home to a relative, the IRS frowns upon you continuing to live there. However, parents could sell the property to a child or other relative at a fair market value then rent the property from its new owners.