Option 1: Make an Outright Gift
Tax-wise, if you make the gift this year, it will reduce your $12.06 million unified federal gift and estate tax exemption. To calculate the impact, reduce the fair market value of the home you would be giving away by the annual federal gift tax exclusion, which is $16,000 for 2022. The remainder is the amount that would reduce your unified federal exemption.
If you’re married, your spouse has a separate $12.06 million unified federal exemption. If you and your spouse make a joint gift of the home, each of your unified federal exemptions will be reduced. To calculate the impact, take half of the fair market value of the home minus the $16,000 annual exclusion. The remainder is the amount by which you would reduce your unified federal exemption.
Option 2: Arrange a Bargain Sale
Say you’re feeling generous, but not so generous that you want to simply give away your home. Consider selling the home to your child for less than fair market value. For federal gift tax purposes, this is treated as a gift of the difference between the home’s fair market value and the bargain sale price.
Tax-wise, this can work out okay, as long as you understand what’s in store for all concerned.
Option 3: Arrange Full-Price Sale with Seller Financing from You
Consider selling the home to your child for its current fair market value with you taking back a note for a big part of the purchase price. When interest rates are relatively low (they still are, by historical standards), this seller-financed deal can give meaningful financial help to your child while also delivering the best tax results for both you and your child.[/vc_column_text][us_image image=”1883″][/vc_column][/vc_row]