No matter what type of property it is you own that you hope to pass on to your kids or another family member, be it a small vacation cabin in the woods, or a large estate property that has been in the family for generations, an estate plan is a great help to determine the best way to keep the home in the family.
There are several avenues that a homeowner can take to pass on a home to their children and this can include gifting the family home to them when you are still alive, leaving it to them in your will upon passing, or selling the property to them. No matter what option you choose, each one has its own legal and tax responsibilities. Therefore, it is a good idea to consult with a professional about each one.
Gifting the home to your children
In some cases, aging homeowners find that the property they currently live, in or a second vacation home, is much more than they can continue to take care of. In this situation, if the homeowner would like to keep the property within the family, they look at the possibility of gifting it to their children to relieve them from the upkeep demands of the home, but still retaining the property within the family. They are then free to purchase a smaller more affordable and maintainable property.
“Should you decide to give your home to your children while you are still alive, there could be a significant gains tax because this is called a carryover cost basis. To avoid this huge cost, you can opt to use what is called a revocable trust to help avoid probate and give your children a step up in taking on the home while avoiding capital gains taxes.” – Maggee Miggins of Miggins Real Estate
Leaving the home to a loved one in your will
A will is most often the means by which a homeowner prepares or makes plans to give their home to a loved one. Upon the passing of the last legal owner of the home, ownership is transferred to the person named in the will of that last legal owner.
Simply stating who you will leave your home to in a will, however, can place the home into probate court as well as place several tax liabilities on the new owner. Some estate planners suggest setting up a revocable trust to bequeath property in a will. This trust will allow the home to avoid going into probate court and help the new owner to save on any estate taxes.
With a trust, the homeowner can dictate who takes ownership of the property and set specific parameters on how they will take that ownership. If the homeowner has more than one child and would like to leave the home to just one of them, a trust can state that this child will receive property ownership when they buy out the other children’s inherited share, for example.
Make sure that you carefully think over the possibilities and ramifications of putting more than one child or a loved one on the deed of a home. This can complicate matters in decisions of what should be done with the home moving forward.
More: The benefits of a life planner, by Chrome Advisors
Selling your home to your loved one
Selling a home can be a part of a coordinated estate plan that may make the most sense especially in a situation where the homeowner can no longer afford the property. This can be a win-win solution for the current homeowner as well as the loved one that would want to keep the property in the family.
There are some drawbacks to this method though. This strategy needs to be well thought out to be beneficial for everyone involved. It is a good idea to think about ways to save money when selling a home to a relative or a child. One good strategy could be deeding the property to your kids and having them refinance the property to cash out the parents.
“Parents will want to think of the most cost-effective way in which they can sell the home to their loved ones. If the home is sold below fair market value this could leave little in the way of funds for the retirement of the parent. When this route is taken there are also taxable gains consequences if a parent sells a home for more than they purchased it.” – John Kinnunen, eXp Realty
There are also scenarios where the result of the home sale could mean higher property taxes for the purchaser.
Wonder what plan you should take in leaving your home to a loved one? It is always best to seek the advice of a financial advisor. You will also want to work with an experienced estate planner and real estate agent to help you layout your plan in the most detailed intentions possible to avoid confusion and extra costs.