The act of passing down a cherished home to a loved one can be a heartwarming gesture filled with emotional significance. But before you hand over the keys, there are several important considerations to consider — especially regarding the potential tax implications of such a generous act.
A common question many prospective gifters ask is, “How do I transfer property to a family member tax-free?” Is this even possible? Fortunately, it is — but it requires a thorough understanding of the gift tax laws and some very careful planning.
The gift tax is a federal tax levied on the transfer of wealth from one person to another. It’s triggered when the total value of the gift(s) in a calendar year exceeds a certain threshold ($18,000 as of 2024). This limit is set by the IRS, which adjusts it periodically for inflation.
The tax rate is progressive, so it increases as the value of the gift increases. That means the larger the value of the gift (over the threshold), the higher the taxes you’ll pay:
The purpose of the gift tax is simple: it prevents people from avoiding estate tax by simply gifting away their assets before death. It’s structured to make sure everyone pays their fair share of tax when transacting real estate — even among friends and family.
Yes, it’s possible to gift a house without paying taxes, but several factors influence whether gift tax applies:
With careful planning you can minimize and in some cases even avoid the gift tax. Some helpful strategies to consider include:
Yes, you can gift a house with an active mortgage. That said, it’s important to consider some critical factors before doing so:
The burden of the gift tax typically falls on the generous giver, not the fortunate recipient. When the value of your generous gift surpasses the annual gift tax exclusion, you become responsible for paying the gift tax on the excess amount.
The recipient isn’t entirely off the hook when it comes to taxes. While they won’t owe gift tax, they might encounter capital gains tax down the road if they decide to sell their newfound abode. The cost basis for the recipient — the starting point for calculating capital gains tax — is usually the same as the donor’s original purchase price. So, if the house has significantly appreciated in value, the recipient could face a hefty tax bill upon sale.
Related article: Can you avoid capital gains tax when selling a home?
In short, while the immediate tax implications rest with the giver, it’s important to consider the long-term financial picture for both parties involved. It’s best to have a plan not just for gifting the house, but also for what will happen to the home after ownership is transferred to the recipient.
Gifting a house is unquestionably generous, but it’s important to approach this decision with careful deliberation. Before transferring ownership, consider these key factors:
The path to gifting a house might seem complex, but with careful planning and expert guidance, it can be a rewarding and tax-efficient experience for all involved. Don’t let uncertainties about gift taxes or legal procedures deter you from sharing this incredible gift with your loved ones.
Need help gifting a home? Orchard knows the intricacies of real estate transactions and can steer you through the process with ease. Our team of experienced professionals can provide personalized advice on minimizing tax implications, ensuring a smooth transfer of ownership. Let us help you make this generous gesture a cherished memory for years to come—reach out today.
When you list with Orchard, we’ll get your home show-ready and make repairs to increase your home’s value at no upfront cost.
Orchard guarantees your home will sell, so you can buy your next one worry-free.
On top of Orchard’s Home Sale Guarantee, we list, prep, and show your old home after you’re all moved out.
Use our home sale calculator to estimate your net proceeds.
Our Home Advisors are experienced local agents who know how to sell for top dollar and help win your dream home.
All Orchard Home Advisors are experienced agents who know your local market inside and out. Request a consult today.
Did you know cash offers are 4x more likely to be chosen by a seller? Let us help you make one on your next home.
Get the most accurate free home valuation — in minutes
Orchard Home Loans shops the market to find your best rates.
A cash offer is 4x more likely to be chosen by a seller. Get qualified today.
Make a cash offer now, and Orchard will sell your old home after you move.
Tell us your must-haves to see personalized home recommendations that meet your criteria.
With Orchard, secure your dream home before you list. Avoid home showings, rentals, and double moves.
Learn More