Want to sell your house to your child in exchange for a hug and a smile? Gross , CPA, E. A, we examine each option and its tax implications. So, keep reading for the most tax-friendly ways to sell your house to your child.
If you live in your house until your final moments, your surviving relatives can inherit your estate , including everything you own minus your debts. This means that when you pass away, you can pass your house on to your child by including it in a valid will. However, when you transfer property after death, the government typically levies an estate tax , and often your child will only receive the house after the government pulls those taxes out of your estate. The recipient is only taxed on what remains after the exemption.
On top of that, your child can potentially avoid capital gains taxes when they decide to sell the inherited house down the line. Although capital gains taxes apply to most capital investment, including houses, most people qualify for the primary residence exclusion. The capital gains tax is calculated based on the original cost of the house and the fair market value of the house at the date of the sale. This can dramatically reduce the amount of capital gains your child has to pay.
Avoid this route if you want to sell or give your house to your child before you die. Depending on the state where your house is located, you may be eligible for a transfer-on-death deed , or beneficiary deed.
This scenario is similar to letting your child inherit the house through your will, but it can simplify the process. Essentially, it lets you give your house to your child upon your death, and your child can avoid the probate process. Similar to when you include a house in your will, a transfer-on-death deed will pass your home to your child on a stepped-up basis.
