8 Ways Tax Pros Say You Can Sell Your House to Your Child

Option 2: Conduct a deed transfer upon death

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. It also falls under the Gift and Estate Tax Exemption, so as long as you stay under that $13.61 million gift mark, you should be able to exclude it from your taxable estate.

To make use of this deed transfer, you would want to file the transfer-on-death deed with the local records office. You’ll keep full control of the property and pay the same taxes on it until you pass away. Upon your death, that property will transfer automatically to your beneficiary. Although these transfers aren’t allowed everywhere, TODs or similar types of deeds are allowed in at least 30 states.

Summary: Who should conduct a deed transfer upon death?

Consider this route if you want the same tax benefits of passing along your house in a will without having to put your child through the probate process. Avoid this route if you want your child to receive your house while you’re still alive.

Option 3: Gift the house outright

What if you don’t want to live in your house until you die? You can gift your house to your child. This is a popular option, but it comes with some caveats.

IRS rules say the giver of a gift must pay taxes on that gift. The recipient doesn’t. So, if you gift your house to your child, you technically need to pay gift taxes, which range from 18%-40% on the value of the house.

Luckily, there are a few ways you might be able to combat this gift tax. First off, you can offset the value of your gift using the Annual Gift-Tax Exclusion. For 2024, the annual gift-tax exemption is $18,000.

It is per-person and per-recipient, so if you and your spouse are both gifting your house to your child, you can double that exclusion amount and gift $36,000 tax-free.

For Example:

Say your house is worth $200,000. You’re married, and your child is also married. You and your husband can give your child and their spouse $18,000 each, and they can exclude up to $72,000 ($18,000 x 4) as part of the Gift-Tax Exclusion. Under the current rules, you would only pay taxes on the remaining $128,000.

At this point, you have two more options. You can either pay gift taxes on the $128,000, or the IRS may allow you to subtract it from your lifetime Unified Federal Gift and Estate Tax Exemption of $13,610,000. Most people subtract the gift from their lifetime exemption amount to avoid the gift tax rate, which can be a hefty 40% at its highest.

For this option, simply file a Gift Tax Return (Form 709) along with your Individual Tax Return (Form 1040) in the year you are making the gift. You won’t have to pay gift taxes, but the Gift Tax Return will help keep track of your gifts every year.

If your estate is greater than $13.61 million, you will end up paying gift taxes, depending on the amount of your taxable estate that’s above $13.61 million. Remember these two things about the outright gift option, though:

1. There is no stepped-up basis when you gift your house.
   Carryover basis applies here instead. The cost of the house when your child sells it later on will be the initial price you paid for it. From the example in Option 1 below, this means your child’s taxable profit when they sell will be $350,000, not $50,000. If the homeowner’s exclusion covers the entire profit, then that amount won’t matter. If not, your child will most likely be paying a capital gains tax.

Carryover vs. Stepped-up Basis Example

Option 1		Option 2
Purchase price	$200,000	Purchase price	$200,000
Carryover basis	$200,000	Stepped-up basis	$500,000
Selling price	$550,000	Selling price	$550,000
Profit	$350,000	Profit	$50,000
Homeowners exclusion	$250,000	Homeowners exclusion	$250,000
Taxable profit	$100,000	Taxable profit	Covered
Capital Gains Tax rate (random)	15%	Capital Gains Tax rate (random)	15%

 

2. You are eating away at your Estate Tax Exemption.
   The Estate Tax Exemption is a lifetime exemption amount that gets smaller every time you use it, although most people’s estates will fall under $13.61 million.

Summary: Who should gift their house outright?

Consider this route if you want your child to own your house while you’re alive and they qualify for the homeowner’s exclusion. Avoid this route if you’re worried about going over your $13.61 million lifetime exemption or your child having to pay a carried-over tax basis.

Option 4: Finance your child’s purchase of the house

Let’s take a quick detour here. Options 1, 2, and 3 are for parents who want to give their children their house outright. If you want to sell your house to your child, there are a few different routes you can take.

A solid option is to sell your house at its full fair market value to your child. This is a great choice if your child is well-settled and wants to earn the house in an affordable way.

Instead of demanding the full price of the house at the time of sale, consider making an installment sale for the full price. It works like this: Say your home appraisal determines your house is worth $500,000. If your child can afford to pay a down payment of 10%, or $50,000, create a note for the remaining $450,000. Make sure the note is written, and that you’ve explicitly expressed the monthly payments your child has to make to you.

Gross stresses that you need to charge at least the applicable federal rate (AFR), or the market rate on the loan. Here are the AFRs as of July 2024:

• Short-term AFR: 5.06%
• Mid-term AFR: 4.49%
• Long-term AFR: 4.61%

As long as the note is legally secured to the house, every month when your child makes principal and interest payments on the note, they can deduct the interest payments as qualified mortgage interest. However, you will still have to pay taxes on that interest income.

You can also help your child by still making annual gifts of $18,000 maximum under the Annual Gift-Tax Exclusion. But make sure that the two streams, gifts and notes, are separate. If you forgive a note payment in lieu of a gift, the IRS might think the entire sale is a discount sale.

With this option, your child’s basis in the house becomes the full purchase price, which likely avoids any future capital gains taxes when they sell the house.

Summary: Who should finance their child’s purchase of the house?

Consider this route if you want your child to earn your house at an affordable rate. Avoid this route if you don’t think your child can make payments at the applicable federal rate.

Option 5: Sell the house to your child at a discount

What if your child is not in a financial position to afford your house at full price? Unfortunately, this is not the best situation for you as a parent.

If you sell your house to a perfect stranger for less than its fair market value, then you can take a loss. It was a bad sale, but the IRS doesn’t care because it’s an arm’s-length deal.

But if you try to sell your house to a relative for less than its fair market value, the IRS considers this a gift and won’t let you take a loss on the sale. This is a related-party sale, and you will either have to use your Annual Gift-Tax Exclusion and a large amount of your Estate Tax Exemption to offset the sale, or you’ll need to pay gift taxes.

Gift taxes when selling below market value

When you sell a house below market value, the same gift tax rules are likely to apply — only rather than giving someone money outright, the gift you’re providing is a discount on the value of the home. Your child’s basis in the house is also lower, which could trigger higher capital gains taxes down the road.

Example:

Say you want to sell your house to your child for $1. You think it’s a smart deal, but really, it puts everyone at a disadvantage. If the FMV of your house is $500,000, and you sell your house for $1, you are essentially giving your child a $499,999 gift.

You can exclude from taxes up to $36,000 of this gift (if you’re married) under the Gift-Tax Exclusion. This leaves $463,999 that you either have to pay gift tax on, or that you must exclude from your Estate Tax Exemption of $13.61 million.

As we mentioned earlier, your Estate Tax Exemption can probably take a one-time hit, since it is so high this year. But if you do this with several houses, you may whittle away your exemption for your final estate.

Summary: Who should sell the house to your child at a discount?

Consider this route if you don’t think you’ll go over your Estate Tax Exemption in your lifetime. Avoid this route if you’re worried about eating away at your final Estate Tax Exemption, or if you don’t want your child to have to pay potentially high capital gains taxes when they sell.

Option 6: Sell the house to your child but continue to live there

One of the more complex situations you can face is if you want to transfer your house to your child’s name, but also continue living in it. Unfortunately, you can’t just change the name on a deed without repercussions down the road. Here’s what you should and shouldn’t do in this situation:

• Do sell your house to your child at fair market value, and then pay rent to live in what’s now their house. This is a perfectly acceptable arms-length deal if the sale and rent are at market rates because you’re paying fairly for the use and occupancy of the home. Your child may even be able to claim various rental property deductions.

Gross suggests that homeowners in this situation should enter a proper sales contract, as well as a bona fide lease agreement between the parent and child. The IRS looks closely at this.

• Don’t sell your house to your child at less than fair market value and then pay less than market-level rent afterwards. The consequence here is that the full fair market value of your home will be included in your estate and taxed when you die, and your child can’t take any rental deductions either.

Summary: Who should sell a house to their child but continue to live there?

Consider this route if you want to sell your house at fair market value to your child and let them collect rental property deductions. Avoid this route if you plan on selling below fair market value and plan to pay low rent.

Option 7: Let your child assume your mortgage

In some instances, you may be able to let your child assume your mortgage, but this is a tricky option. You could use a quitclaim deed to transfer the house, but that can be more complicated than most people realize. The biggest problem is that a quitclaim deed only transfers ownership of your house, not any mortgages or loans associated with the house.

So, the mortgage will remain in your name, and you still have to pay it. Even worse, most mortgages have a due-on-sale clause, where you have to immediately pay the mortgage in full if you transfer ownership of your house.

So, you have a few choices here:

1. You can pay off your mortgage and transfer your house free and clear.
2. You can ask if your bank will let your child take over your mortgage. Not all banks allow mortgage assumption, and not all mortgages are eligible. You would sell your house at a price equal to the mortgage balance, and your child would need to be creditworthy and meet the bank’s lending criteria. According to Gross, even a mortgage assumption could be considered a gift, depending on how much of the mortgage is left over, so clarify with your accountant before you do this.
3. You can check with your mortgage lender to see if you can refinance your existing mortgage and add your child to your home’s title, making them co-owners.

These are complicated transactions, so make sure you check with your bank or mortgage lender, as well as your accountant, before entering one.

Summary: Who should let their child assume their mortgage?

Consider this route if your mortgage lender agrees to allow it and you’ve talked the tax implications over with a professional accountant or if you want to pay off your mortgage immediately. Avoid this route if your lender doesn’t allow this type of mortgage transfer.

Option 8: Use a personal trust

Lastly, you have the option of using a Qualified Personal Residence Trust (QPRT) to pass on your house to your child. A QPRT is a type of irrevocable trust and is a great way of passing your house on to your child while still being able to live in it. Here’s how it works:

With the help of your accountant, you first create a QPRT and transfer your house into the QPRT. You name the beneficiaries of the trust, and then you set a trust term limit.

The house remains under your name, you still make your mortgage payments, and you’re still allowed to live in the house until the end of the trust term limit. After the term ends, the house transfers to your child’s name, so you have to pay your child’s rent if you want to continue living in the house.

Now, let’s look at the tax implications of this option.

When you transfer property into the QPRT, it’s treated like a taxable gift by the IRS. In the eyes of the government, transferring your house into the trust is the same as gifting your house to your child, so you have to either pay gift taxes or deduct the value of your house from your estate tax exemption.

The benefit of using the QPRT is that you could transfer your house into the trust at a lower value than it’s actually worth. If you’ll be living in the house for many years before it is actually transferred to your child, the IRS lets you account for that decrease in value today.

Example:

Say the fair market value of your house is $1 million today, and you create a QPRT, naming your son the beneficiary. There are some complex calculations that take place behind the scenes that take into consideration how old you are, the term limit of the trust, interest rates, and a few other things.

After all the calculations, if we assume your house is only valued at $350,000, the gift taxes and estate tax exemption only applies to that $350,000, not the entire $1 million. This is a huge difference from normal gift taxation, as you have essentially transferred an asset worth $1 million for just $350,000, saving $650,000 of your estate tax exemption.

If you outlive your trust term, when your child gets ownership of the house, the value of the house will be your initial purchase price, like the regular gift tax rules in Option 3.

Keep in mind, this option may not be worth it unless you are ultra-rich. With the estate tax exemption being $13.61 million this year, unless your assets come close to that, you might as well just use your estate tax exemption for each gift you make.

Summary: Who should use a personal trust?

Consider this route if you think your estate value will be above $13.61 million or you want to keep control of the property throughout a trust term limit. Avoid this route if you want to gift your house right away, or you think you may change your mind later on.

What’s your best option? Here’s what experts say

The best option, according to Gross, is to sell your house at fair market value and finance your child’s purchase of your house. After a few years, the house will be passed on to your child, it doesn’t affect your estate, and it’s tax-free for your child. It leaves all parties in the most favorable position.

Skinner says it all depends on what you’re trying to accomplish. “The starting point for any of this is, ‘What is the parent’s objective?’” he explains. He says the best option will hinge on whether the parents want cash, want to give the home to their child right away, what their child can afford, and several other factors.

No matter what option you choose, just remember to lean on a tax professional’s help. Any one of the options above might work for you, depending on your situation. So read through them carefully, and consult a tax professional to pin down the best choice for you.

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