What Is House Gifting?
- The tax implications for giving someone a house as a gift are complicated. A gift tax or an estate tax may apply in house gifting situations. Consult with a tax expert before gifting a home or other property.
When planning your estate, one of the largest assets you may need to consider is your house. One estate-planning strategy to is make the house a gift to someone as a way to reduce taxes that would be required if you sold the house instead.
It is possible to gift a house, but the tax implications for house gifting can be – as you might imagine – complicated.
Here’s what you need to know about gifting a house.
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Can You Gift a House?
It is possible to simply give a house as a gift to someone other than your spouse. However, any gifted property that is valued at more than $15,000 (or $30,000 if owned by a couple) requires filing an IRS Form 709 gift tax form.
The tax applies whether or not the donor intends the transfer to be a gift, and it applies to the transfer by gift of any type of property.
“You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.” - Internal Revenue Service (IRS)
How Much Does a Gift Have to Be Worth to Get Taxed?
The IRS allows individuals to gift a total of $12.06 million (as of 2022) over your lifetime without incurring a gift tax. Couples can gift up to $24.12 million.
Thus, if your house is worth less than those figures, the IRS gift tax may not be applied, although a gift tax form should still be filed.
Do You Pay Capital Gains Taxes on Gifted Houses?
While gifting a home can save the owner in taxes, the recipient of the property will be required to pay capital gains taxes when they sell the home.
Capital gains taxes can be very high, because a gifted property does not receive a tax basis step up. The tax basis is the original cost of the property for the giver, and it becomes the tax basis for the recipient. Thus, the recipient has to pay taxes on all the capital gains of the home since its purchase, which can be substantial if the home has been owned for a long period of time and increased dramatically in value.
An inherited, rather than a gifted, property does receive a tax basis step up, to bring it in line with current value.
Can You Gift a House If You Have Medicaid?
Federal Medicaid law requires an individual to transfer any assets at least five years before applying for Medicaid. Transfers made less than five years beforehand renders the individual ineligible for Medicaid for a certain period of time, which is known as a transfer penalty.
The amount of time that you’re required to wait before applying for Medicaid after transferring assets depends on the value of the assets.
Selling a House vs. House Gifting
Another option is to sell the property to someone at a below-market value. The IRS, however, considers the difference between the sale price and the fair-market value of the property to be a gift, subject to the above gift tax rules.
The difference also applies to estate taxes, which come into play when the gift tax is not relevant. Which tax applies depends on the timing of the transfer of ownership.
Estate taxes and gift taxes are subject to exemptions, which means only very valuable property is likely to be taxed. Individuals can give up to $12.06 million, and couples up to $24.12 million, during their lifetime or from their estate with no gift or estate tax requirements.
State Taxes and House Gifting
While the federal tax exemptions are so high when it comes to house gifting, state tax laws are different. Twelve states and the District of Columbia levy an estate tax and/or a gift tax, regardless of whether you’re required to pay a federal gift tax.
State exemption amounts can be much lower, which means you may be more likely to have to pay state tax for gifting a house. These taxes should be considered when planning an estate or making a gift.
Gifting a Home to a Charity
Yet another option is to gift a property to a charity organization. There are significant tax savings available from doing this.
Giving the property to a charity removes the home as an asset in your estate, so there will be no estate taxes for the giver. In addition, a home that is gifted on at its current value, not the cost basis, avoids capital gains tax.
The decision to dispose of real property in an estate or as a gift is complex and often, because it may be a longtime home with real sentimental value, fraught with emotion.
The financial implications are also complicated and every situation is different. It is wise to consult with experts in your state’s tax laws, a financial and estate planner and a real estate professional before making any decision.