How To Gift A House To A Child, Friend Or Family Member

With endless memories and sentimental value, it can be tough to sell your family home. While many consider selling their home, you may have questioned if you can gift a house to someone. Although it’s possible, the task isn’t as simple as your friends or family moving right in due to both the estate and gift tax.

Giving a house as a gift doesn’t have to be difficult. We researched the tax consequences of gifting property to help you navigate your options.

Can You Gift A House To Someone?

Yes, it’s common for people to pass down real estate to family members or organizations. Typically, after death, people want to share their wealth by giving a generous gift. There are many strategies to gift real estate to someone you love, all of which come with their own set of tax implications. In 2024, a gift of equity above $13,610,000 will be taxed whether you sell your home to your child for $1 or below market value.

When you gift a house to someone, ownership is transferred through a process called conveyance. This is represented in a legal document – usually a title, deed or lease.

Reasons To Give A House As A Gift

Below are reasons homeowners consider gifting real estate.

• Recipient has bad credit: When it comes to giving someone a house, the beneficiary’s credit score would not be a determining factor, since the person receiving the house doesn’t have to qualify. Ultimately, you don’t have to be preapproved for receiving a gift. This option is ideal if the recipient has poor credit.

• Increasing exemption amount: Since 2018, the estate tax exemption amount has been trending up. This means you can gift property and still avoid the estate tax if the amount is under $13.6 million or $27.2 million since couples can give matching gifts.

Tax Implications Of Gifting A House

Often, people assume that selling their house to their loved ones will help them avoid taxes in the future. Gifting real estate has financial benefits, but the Internal Revenue Service (IRS) created federal gift tax and estate tax implications on gifting property.

According to the IRS, an estate tax is a tax on your right to gift property. Here's how it works: The value of everything you own is calculated into a net amount. Then that number is added to the number of taxable gifts you have, which creates an estate tax.

In 1916, estate taxes were established to tax the income of affluent taxpayers. Policymakers noticed the inheritance of wealthy heirs would normally not face any taxation. This influenced the creation of the estate tax. Depending on how you gift your home, tax implications may appear for each gifting strategy, which will be discussed in depth later.

How To Gift A House To Someone

If you own your home, you have the right to gift that property to whomever you like. However, if not done properly, the IRS will want in on the deal. Always consult with a real estate agent or attorney in every real estate transaction. This will guarantee you’re taking the right steps to avoid unnecessary tax implications.

Continue reading to learn about the different methods for gifting a house and their tax implications.  For each method, we’ll run through an example using a home with a fair market value of $350,000.

1. Buy A Home For Them

If you’re fortunate enough to be able to purchase a home for someone, it’s possible in two ways:

• Buying a house with cash: After you purchase the home, make sure the deed is in the recipient’s name. This will give them full responsibility for the property and taxes. It also gives them the freedom to do what they wish with the home, such as renovating.

• Investment property: If you buy a house for someone with a mortgage, it’s considered an investment property since you won’t live there. Please be advised this method comes with higher interest rates and down payments compared to primary properties.

Tax Implications

Buying a home for someone will exceed the annual gift tax exclusion of up to $15,000. For that reason, the IRS will prompt you to file Form 709. Despite a lifetime exclusion for couples, you will have to report gift tax and real estate over $15,000 to the IRS against your lifetime exemption.

The recipient of the property doesn’t have to report the gift, meaning their income tax won’t be affected. When the donor exceeds the exclusion ceiling, they can expect to pay 18% – 40% in a gift tax.

In the example below, the gift tax is 20% and the fair market value of a house is $350,000. Here’s how the donor is impacted.

• Fair market value: $350,000

• Taxes owed: $70,000

2. Sell Your House To Them On The Cheap

Selling your home to a friend or family member is slightly different from selling to a stranger. Instead of an arm’s length transaction, both parties will participate in a controlled transaction. A controlled transaction is a deal that involves two related parties. The IRS will monitor closely to determine if the price of the home meets fair market value or is considered a gift.

Tax Implications

If you’re selling the home below fair market value through a gift of equity, you must report it to the IRS if it exceeds $15,000. The seller may have to pay a gift tax, subject to the lifetime exclusion limits mentioned above for gift and estate tax. They may also be subject to capital gains tax depending on how long the donor had the property and its value. Here’s an example where you gift your child a property $100,000 below the fair market value and the current tax rate is 15%.

• Fair market value: $350,000

• Sale price: $250,000

• Taxes owed: $37,500

3. Give Your Home To A Charitable Organization

Gifting a property is beneficial not only to the charity but also to you. The biggest advantage is a hefty tax deduction that can be up to 60% of your income. The value of your home when you first purchased it could be the amount of the tax deduction. If your deduction is based on the current value of your home, your deduction will be limited to 30% of your income.

Tax Implications

Since you would be making a generous contribution, tax consequences will be scarce. Reassigning the property to a charity instead of selling it to someone will eliminate the home from your estate. Therefore, estate taxes will not be a concern for the gift-giver.

Most importantly, if your property is being gifted on an appreciated basis (the current value of your home) and not the cost basis (the price paid for the property, any buyer-paid closing costs and the cost of improvements made to the property), you’ll have the opportunity to avoid capital gains tax.

Be sure to consult with a tax advisor throughout this process.

• Appreciated basis: $350,000

• Tax deduction: $105,000

Gifting Property FAQs

Now, we’ll dive deeper into gifting real estate with these frequently asked questions.

Can I sell my house for $1 to a friend?

Yes, if you’re the owner of the property, you can sell your home to whomever you like at any price. However, make sure you read through all the restrictions to take the best course of action.

Can I buy my parents’ house to avoid inheritance tax?

There are no federal inheritance tax laws. Only six states impose the inheritance tax: Iowa, Kentucky, Pennsylvania, New Jersey, Maryland and Nebraska. Because of this, where the deceased person lives matters. For instance, if you live in New Jersey and your relative in California receives money after you pass, they’ll pay an inheritance tax.

Inheritance taxes vary by state and typically don't affect immediate relatives, only distant ones. Be sure to get in touch with a tax professional or research your state’s department of revenue.

How do you transfer a house with a mortgage?

Transferring a house with a mortgage is achievable, but you may face some challenges since your property is supposed to secure the loan. The mortgage must have a clause that allows someone to assume responsibility for the remaining amount. Then the lender must approve of the new borrower and reassignment.

If the lender is unable to approve the transfer, the new homeowner can take out a loan on their own, and the former owner will be responsible for paying the rest of the balance.

In addition, loans will typically have a due-on-sale section. This means the lender can make the remainder of the loan due upon the closing or gifting of a property.

The Bottom Line: You Can Gift A House To A Friend Or Family Member

Whether you want to gift your house to a friend, loved one or charitable organization, it’s possible. Gifting a house comes with benefits for you and the recipient if your estate’s gross net is below the tax exemption amount. Take the time to contact a real estate agent, attorney and tax advisor about implications before moving forward.

Gifting a house may not be every homeowner’s first choice. If you choose to list your home, contact Rocket Homes^SM to match with an agent who can walk you through each step of the process.