28 Oct What’s the smartest way to gift my home?

Q. What are the tax consequences of gifting my home, either to my married daughter or to my grandchild? Is it better to sell it to her at market value, pick up the capital gain and then gift the money in a lump sum? Or should I sell it and gift her $15,000 a year?
— Tax-wary

A. It’s wonderful that you’re in a position to be so generous with your daughter.

For starters, we’ll assume the home is in New Jersey and that you’re sure you won’t need the home or the money from the sale of the home.

You can gift your house or any other asset to anyone, provided that person is capable of receiving the gift and takes delivery or ownership of it, said Gene McGovern, a certified financial planner with McGovern Financial Advisors in Westfield. You can therefore gift your New Jersey house to your daughter or to your grandchild.

McGovern said if the grandchild is a minor, the gift would have to be made either in trust with a trustee or through a Uniform Transfers to Minors Act (UTMA) account that has a custodian until the grandchild reaches the age of majority.

“All gifts are potentially subject to gift taxes, which are generally paid by the donor, not the recipient,” McGovern said. “While New Jersey does not impose a gift tax, the federal government does.”

But not everyone will be subject to the tax.

That’s because each year, you can give anyone up to $15,000 gift tax-free, McGovern said. For example, you could give $15,000 each to your daughter and to her spouse, for a total of $30,000, gift tax-free. If you’re married, you and your spouse could each make those gifts, totaling $60,000 per year, free of any gift tax.

That exclusion amount is periodically increased for inflation, McGovern said.

Gifts to someone above $15,000 per year that aren’t covered by an exclusion or exemption are subject to federal gift tax and require you to file a federal gift tax return on IRS Form 709. However, you’re unlikely to actually pay any gift tax even though you have to file a return, he said.

“That’s because, under the federal unified estate and gift tax system, each of us has a lifetime exclusion from gift and estate taxes of $11.4 million, over and above the annual $15,000 per person gift tax exclusion,” he said. “And that $11.4 million amount is increased annually for inflation. For a married couple, the exclusion totals $22.8 million.”

All that means that you can transfer up to $11.4 million, whether as a gift during your lifetime or as a bequest after your death, before any gift or estate taxes become payable, McGovern said.

There are other exemptions to the gift tax.

For example, you can make unlimited gifts to qualified charities without any gift tax consequences. The same is true for gifts to spouses, provided both spouses are U.S. citizens. And payments of tuition or medical expenses for someone else, such as for your children or grandchildren, are gift tax-free, provided they’re made directly to the school or the medical care provider, McGovern said.

Turning back to the question of whether and how to gift your home, while it’s likely that you won’t have to pay any gift taxes, there are income tax considerations to be aware of.

“If you sell your home and have a capital gain, you may qualify to exclude up to $250,000 of that gain from your income,” he said. “The exclusion is up to $500,000 if you’re married and file a joint return with your spouse.”

To qualify for the capital gains exclusion on the sale of your home, you must have owned the home and also used it as your principal residence for at least two of the previous five years.

McGovern offered this example: Let’s assume that you own a home that’s worth $500,000, and that you’ve owned it and used it as your residence for at least two of the past five years. Let’s also assume that your basis in the home—the amount you paid for it, plus the cost of any capital improvements—is $250,000. Provided you qualify under IRS rules, you could exclude the entire $250,000 gain ($500,000 sale price minus $250,000 basis) when you sell it.

On the other hand, if you gift the house to your daughter or anyone else, in most cases your $250,000 basis would carry over to the recipient, McGovern said. Your daughter and her spouse would then have a $250,000 basis in the house and a potential capital gains exclusion of up to $500,000, provided they file a joint return, if they subsequently sell it.

If you’d prefer to remain in your home, one alternative would be to leave it to your daughter in your will rather than gift it now, he said.

“In that case, the house would be stepped up to its fair market value at the date of your death, and your daughter’s basis in the inherited house would then be $500,000 or more—its fair market value when she inherits it—instead of $250,000,” McGovern said. “That increased basis in the home would reduce the amount of any future capital gains if your daughter were to sell the house later on.”

Yet another alternative would be to sell the house now to a third party, take advantage of the capital gains tax exclusion, and then gift the money to your daughter instead of the house, he said.

The best outcome financially would depend on both your and your daughter’s individual financial circumstances, future plans, and relative income tax brackets, McGovern said. Other factors to consider would include the age of the house, its location and condition, whether your daughter would use it as a primary residence or as a rental property, and whether you expect the house to increase in value over time.

One final consideration to be aware of: if you gift the house to a grandchild, the generation-skipping transfer tax (GSTT) would apply in addition to the gift tax.

“The GSTT is a separate tax system that applies when gifts or bequests are made to a person who is two or more generations below the person making the gift or bequest, such as a grandchild or great-grandchild,” he said. ”However, many of the same exclusions that apply for gift tax purposes also apply for GSTT purposes, so you’d be unlikely to have to pay any GSTT.”

Consider sitting down with a financial advisor or estate planning attorney to help you figure out the best strategy for you and your family.

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This story was originally published on Oct. 28, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.