Pros and Cons of Gifting a Home to Your Child

Gifts symbolize happiness, recognition, and joy. With real estate prices increasing by the day, many parents consider gifting their house to their children as part of their estate plan. But gifting a home is not as forthright as it may seem. Changing house ownership can have many serious financial and tax implications for all the people concerned. This is why it important to evaluate the pros and cons before going ahead with the step.

Here are a few points that you need to consider before gifting your house to a child.

Permanent loss of property

A house is one of the most valuable assets that one owns during their lifetime, both financially and emotionally. By legally gifting the house to your children, the ownership of the house changes and the house is counted amongst your children’s assets. They have the right to sell, rent, or mortgage the house. They can also decide to evict an occupant of the house. Another important thing to note is that once the ownership transfer is complete, even if you outlive your child, the property will be passed on to their beneficiary and not belong to you.

Loss of revenue stream

Home equity can prove to be a big savior during your retirement. You can rent it out for an additional revenue stream. You can also sell it in case of an emergency. But once you have gifted the property to a child, you are no longer the legal owner, and therefore any revenue generated from that property will not be yours. Having a house or property is often seen as a backup to deal with unforeseen circumstances. But gifting it can turn out to be a loss if you do not have any other alternative fund to depend on, in your hour of need.

Tax implications

Gifting a home is considered a gift deed. A gift deed is a legal record of a transfer of a moveable or immoveable property from one party to another. This could be out of love and affection and does not necessarily involve any monetary transaction. As per the current law, a gift worth $15,000 is considered tax free in a financial year. For a taxpayer, gifting a house may attract federal gift-tax liability or the attention of the IRS and IHT, as the cost of the house is likely to exceed the permissible limit.

Reselling the house can also attract capital gain taxes. This could have financial repercussions for your children if they intend to sell the house shortly after acquiring it. Ideally, your child needs to reside in the house for at least two years before deciding to sell it, so they may to ward off potential capital gains taxes.

Unwanted claims

Going beyond the tax consequences, a property gift to your children may also attract unwanted attention and claims by creditors. If your child is going through a divorce, property claims from their spouse can result in your child losing the ownership of the house. Furthermore, since the house forms a part of your child’s estate after signing the deed, bankruptcy claims of creditors can also be settled against the house.

Mortgage burden

You may burden your child with the additional liability of repaying the mortgage if the gifted house property has a mortgage or loan attached to it. If it is a transferable mortgage, the responsibility of repaying the mortgage would fall on the child’s shoulders. Moreover, if it is a non-transferable mortgage, then your children would need to get the debt refinanced. This can prove to be an expensive affair, and if they don’t have a credible credit history, it can be hard for them to find good refinancing options.

Impact on your Medicaid coverage

House property gifts to your children may have a considerable impact on your eligibility for Medicaid coverage required for nursing care. The lookback period clause and its impact on Medicaid eligibility is an important point to consider when gifting a house. Any gift or transfer made within the last five years of applying for Medicaid may result in penalties or ineligibility from receiving the facilities. As per the current rules, if you have made any gift or transfer within 60 months from the date of application, your claim would be rejected. It is important to take into consideration your health condition before you plan to gift your house.

Reason for gifting

When you decide on gifting your house, you need to respect your children’s wishes and needs before you end up signing the deed. Knowing whether your child needs the house or whether they are willing to share the property with other siblings, can simplify the planning process. If the reason for the gift is estate planning, you need to clarify the same with your children to avoid any ambiguity or sibling rivalry.

Conflict and resentment

If you are gifting your house to one of your children, amongst the many you have, it can result in family disputes and resentment. Multiple ownerships of one house is also a problematic idea, as different people may have different needs and goals.

To sum it up

Irrespective of whether you plan to gift your house today or years into the future, the process can involve certain complex tax and financial implications that one needs to thoroughly review and understand. It is important to evaluate the positives and negatives that gifting a house can have on you as well as the rest of your family and then make a sound decision.

If you are planning to gift a house to your child, it is best advisable to seek professional advice. You can get in touch with Financial Advisor to know more about estate planning and whether it is the right time for you to consider such a big step.