Though real estate and probate laws vary by state, you have multiple options for transferring your house to your child. Each option offers both advantages and disadvantages so you need to consider the choices carefully. Unless you go about it in the right way, both you and your child could lose money or end up owing the government a huge tax bill.
Sell the Home Outright
Transfer ownership of your home by selling it to your child for full market value. Selling the home below its market value could trigger the federal gift tax for which you would be responsible. If financing is a problem, you can provide owner financing for the sale and charge your child interest on the loan. You can charge lower interest as long as you charge the minimum rate set by the Internal Revenue Service. Get all agreements in writing so that neither of you has questions later. Like with any mortgage contract, include the provision that if he defaults on repaying the loan, the home returns to you.
Offer an Assumable Mortgage
Another option is for your child to assume your mortgage if you still owe a balance on the principal. Instead of applying for a new mortgage, loans insured by the Federal Housing Administration or guaranteed by the U.S. Department of Veteran Affairs offer a borrower the opportunity to assume the terms of the existing mortgage. Your child must still apply for the loan and meet the lender's requirements to qualify.
Gift the Home
Gift your home to your child while you're alive. Although gifts that fall below the $5.34 million lifetime tax-free limit are not subject to federal gift tax, gifting more than the annual exclusion amount to any one individual means you will have to file a gift tax return. By gifting the property, your child's tax basis is the home's original purchase price rather than its current fair market value. If she sells the property, she has to pay capital gains tax on the difference between the home's cost basis and sales price.
Establish Life Estate Ownership
Transfer ownership of the home to a life estate, in which case your child owns the home when you die without it passing through probate. As a life tenant owner, you maintain an interest in the property and have the right to use and occupy the home during your lifetime. Since the life estate gives your child co-ownership, the laws in your state may require you and your child to divide expenses such as real estate taxes, homeowner's insurance, upkeep and other costs associated with home ownership. A key disadvantage includes ineligibility for Medicaid benefits for a time should you need nursing home care.
Create a Revocable Living Trust
In creating a living trust, you retain control of your home during your lifetime. The home automatically passes to your child when you die although you have the right to revoke the trust at anytime. You can name yourself as the trustee so that you can manage your assets as you see fit. By deeding your home to the living trust, you take your name off the property and, therefore, it won't have to go through probate following your death.
- Bankrate: 7 Tips for Selling Your Home to Family
- Bankrate: Assumable Mortgage -- Take Over Seller’s Loan
- Forbes: IRS Raises Limit on Tax-Free Lifetime Gifts
- Berkshire Elder Law: Life Estate Ownership of Real Estate
- Florida Probate Solutions: What Is a Life Estate? How to Avoid Probate in Florida with Life Estate?