Tax Implications of Giving Your House to Your Child

Written by david carnes
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Tax Implications of Giving Your House to Your Child
House (house image by kruszek from Fotolia.com)

If you give your house to your child, tax implications may arise depending on the terms of the gift and how much the house is worth. The IRS offers an annual exclusion from the value of gifts, but if the exclusion is exceeded then the donor must file a gift tax return and pay the tax.

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Definition of "Gift"

The question of whether or not a given transaction qualifies as a gift for tax purposes depends on the effect of the transaction and your motivation for undertaking it. If you sell a house worth £83,200 to your child for £32,500, for example, you have in effect given a gift of £50,700 as long as you had "donor intent". "Donor intent" means that your ultimate motivation for the transaction was generosity, admiration, or charity.

Exclusions

You may give a gift of up to £16,900 (in 2010) without triggering the gift tax (gifts to spouses are always excluded from taxation, however). In the above example, a gift of £50,700 would trigger the gift tax. However, since the exclusion applies to each donee, giving one-third interests in the house to each of three children would not trigger the gift tax.

Calculation of Gift Tax

If you make a gift by transferring property to someone for an unusually low price, the IRS will determine the value of the gift by subtracting the price paid by the donee from the property's fair market value. "Fair market value" means the price that the property would fetch in the market in which it is situated, between a buyer and a seller who are under no coercion to complete the transaction (this is known in legal jargon as an "arm's length transaction"). Gift tax rates range from 18 to 35 per cent of the amount of the gift (after subtracting the exclusion). In the above example, the rate would be 26 per cent in 2010.

Gift Tax Returns

If your gift exceeds the annual exclusion, you will need to calculate the amount of the gift and file IRS Form 709 by April 15 of tax year following the year in which the gift was made. The return should be mailed to the Internal Revenue Service, Cincinnati, OH 45999 rather than to the IRS service centre to which you normally mail your Form 1040 tax return. You do not need to mention the gift on Form 1040, and you cannot deduct it from your taxable income.

Fraudulent Conveyance

Giving a gift to your child in order to shield it from creditors who might seize it is not considered a gift from income tax purposes, because there was no donor intent. Creditors will be able to reverse the transaction and seize the house.

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