How to Gift a House: 3 Alternatives to Gifting Property

House gifting involves the transfer of a house, property, or other real estate by the owner to another party, typically adult children or other family members. Gifting real estate is an option for individuals with large real estate portfolios as part of estate planning—the process of designating the recipients of an individual’s asset in the event of their incapacitation or death. While gifting property can be a generous and potentially life-changing gesture for the recipient, it generates considerable tax consequences.

The Internal Revenue Service (IRS) considers real estate a taxable gift. However, tax law allows property owners (or their estate) to gift up to $15,000 in cash or assets annually, which can be material goods, stocks, or real estate, to an individual without incurring the federal gift tax or estate tax. Moreover, this annual gift tax exclusion is not limited to a single individual: owners can give up to $15,000 to each family member, friend, or other party and meet the exemption amount.

Depending on various factors, the IRS may impose a tax rate on transfers of money or gifts to others that do not generate any income. The giver is usually responsible for paying these taxes.

Whether you’re gifting property or receiving a gift, you should seek legal advice to answer any questions about taxable gifts. There are several significant tax implications of gifting property, including:

• Capital gains tax: The capital gains tax, which taxes the growth in value of an investment after it’s been sold, also applies to property gifts. When the recipient of an asset sells that item, they pay capital gains tax based on the previous owner’s cost basis (its original price). However, property acquired through inheritance or gift incurs a step-up in cost basis, which means that the price is adjusted to the asset’s fair market value on the date of the previous owner’s death.
• Estate tax: The federal estate tax works similarly to the gift tax but applies to property that an estate holder transfers after death. The estate tax only applies to the part of the estate’s gross value that exceeds the minimum estate tax exemption.
• Medicaid: Federal Medicaid law assesses a fee or transfer penalty on anyone who applies for Medicaid five years after transferring assets, including real estate, as part of an estate plan. The transfer penalty can be incurred by any form of transfer, including charitable gifts and even the annual tax-free gift and lifetime exemption allowed under federal law. Individuals must have documentation that proves they received a fair market value price for the transfer to avoid the fee or penalty of ineligibility.

There are several alternatives to gifting property that can avoid tax consequences and keep a life estate out of probate, including:

1. 1. Donate the house as a charitable gift. To avoid the capital gains tax incurred by selling or transferring the property, some property owners donate it to a charity and deduct it at the fair market value. The income tax deduction applies to the tax year in which the home was sold and can carry forward for the next five years. The deduction is limited to a specific percent of the owner’s adjusted gross income (AGI) for cash gifts and assets. Depending on the state of residency, property owners who donate to a charity may be eligible for additional tax incentives.
2. 2. Create a donor-advised fund. A donor-advised fund is like an investment fund for contributions to charitable organizations, which some property owners donate to in exchange for a tax deduction. Asset holders can continue to receive tax-free appreciated income on the donation until they officially transfer the property, which must be lien-free and non-depreciated.
3. 3. Sell the house. Some property owners sidestep tax penalties by selling the house at a fair market value purchase price to a family member. Then, if they plan to continue to use the home as a primary residence, the family member can rent it to them and deduct any household expenses as a business expense. However, the property owner forfeits control of the property by selling it.

There are several different ways to gift a house, including:

1. 1. Estate plan: If a property’s value is less than the lifetime exemption for the gift tax and estate tax, the owner can transfer it to a beneficiary as part of an estate plan. The transfer of property is considered an inheritance instead of an actual gift and will allow them to sell the property, if so desired, and pay capital gains tax based on the previous owner’s cost basis.
2. 2. Life estate: If a property owner wants to gift a house or property to a family member but also wishes to continue living there to avoid paperwork and probate, many options are available. A life estate deed will streamline the transfer of the property to a beneficiary after the owner’s death; the owner may still live there but remains responsible for the tax bill and insurance. With this house-gifting method, the owner waives their right to refinance or make major changes to the property without the beneficiary’s consent.
3. 3. Joint tenants: Property owners can add beneficiaries to the property deed as joint tenants. The deed must list both parties with the right to survivorship, which will ensure that the property will go to the beneficiary upon the date of death. If the property is part of a business, the owner may consider obtaining a quitclaim deed, which transfers their partial ownership to the surviving party. Learn more about joint tenancy in our guide.
4. 4. QPRT: A Qualified Personal Residence Trust (QPRT) transfers an interest in the property to the beneficiary but allows the owner to maintain control of it for a specific period. The owner or the beneficiary must live on the property during the QPRT term. However, the beneficiary controls the property once the specified period ends, even if the owner is still living there.
5. 5. Trust: If the estate is worth more than the taxable life exemption amount, an irrevocable trust will transfer the property to the beneficiaries and eliminate estate taxes by removing the property from the owner’s estate. However, the trustor can’t remove the property from the trust after its establishment. If the property is sold, the proceeds remain in the trust. Trustors may incur the transfer penalty for Medicaid eligibility.

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