From Thomson-Reuters —
If you have an adult child who wants to buy a home in today’s overheated market, it’s financial combat out there and maybe a fight that cannot be won. If you are ready to move out of your current home (perhaps to downsize or to move to a retirement community, a warmer climate, or a lower-tax state) and don’t really need the money from selling your home, you may want to consider one of these options.
Maybe you are feeling so generous that you would consider simply giving the home to your adult child. Tax-wise, if that happens this year, it will reduce your unified federal gift and estate tax exemption (which is $12.06 million reduced by any taxable gifts you’ve made in previous years).
If you are married, your spouse has a separate unified federal exemption. If you and your spouse make a joint gift of the home, each of your unified federal exemptions will be reduced.
Either way, there typically won’t be any federal gift tax due, because the gift(s) will be sheltered by the unified federal exemption(s), assuming you have not already used up a big chunk of your exemption(s) by making substantial earlier gifts. Getting the home out of your estate by giving it away is a good estate-tax-avoidance strategy, especially if the home continues to appreciate.
Say you are feeling pretty generous, but not so generous that you want to simply give away your home. In this scenario, consider selling the home to your adult child for less than Fair Market Value (FMV).
For federal gift tax purposes, you are treated as making a gift of the difference between the home’s FMV and the bargain sale price.
Like an outright gift, the gift connected to a bargain sale can be sheltered with your unified federal exemption(s). Tax-wise, this can work out OK. Ask us for full details.
Full-price sale with seller financing, from you
A third option to consider is selling the home to your adult child for its current FMV, with you taking back a note for a big part of the purchase price (seller financing).
A thoughtfully structured seller-financed deal can give meaningful financial help to your child because you can charge an interest rate that’s below what a commercial lender would charge. Ask us for full details.
This article presents three options that can address your home-starved adult child’s housing dilemma. You also may want to read the IRS Publication 523, Selling Your Home.
If you are interested in pursuing these options, contact the experts at the Pinnacle CPA Advisory Group for more information, including the tax implications. To set up an appointment to explore this idea, or to review any tax or accounting issue, call us at (614) 942-1990, send email to us at firstname.lastname@example.org, or fill out our Contact form at cpaagi.com/contact.