What Are the Costs and Taxes to Transfer a House to My Child?

The costs associated with a title transfer will vary by state and by how the transfer is accomplished. Filing a deed yourself may be the cheapest method, but it will require quite a bit of homework to ensure you have filled out and correctly filed the appropriate paperwork.

Online legal document centers, such as LegalZoom, offer deed transfer services for around $250, plus filing fees. These services typically include title research, creation of the real estate deed, and filing of the deed with the county recorder's office. You can also hire a real estate attorney to execute the deed transfer. This might be the most expensive option, but it may also be the least stressful since you will be certain the transfer was executed appropriately.

Key Takeaways

  • Filing a deed yourself might be inexpensive but requires being informed.
  • Hiring an attorney might be expensive, but also less stressful.
  • Transferring property could cost more than leaving it as an inheritance.

Costs of Tax Consequences

Tax consequences of selling a property to a child can end up costing them more money than if they were to inherit the property later. Assume you purchased your home years ago for $50,000. Over the years, you put $20,000 into the home. It has a current market value of $250,000. Because you transferred the home to your child while you were still living, your cost basis, which would be $70,000, becomes your child's basis.

If your child sells the home, they would owe capital gains taxes on the difference between the sale price and the cost basis, which would be $180,000. At a capital gains rate of 15%, that would equal $27,000 in taxes. The tax rate would be higher if you owned the home for less than one year, at which point the profit would be taxed as ordinary income.

If your child moves in and lives in the property for at least two out of five years before selling it, up to $250,000 of profit can be excluded, and $500,000 can be excluded if filing jointly with a spouse. Your child will have to use your cost basis of $70,000, which includes the $50,000 purchase price, plus the $20,000 in improvement costs.

When a parent transfers the title of the home to a child without receiving valid consideration, this is considered a gift. Gifts in excess of the annual exclusion rate must be reported to the IRS, and the donor will be subject to gift taxes.

Transferring Title vs. Inheriting

If your child inherits the property upon your death instead of you transferring the deed to them, the child will receive the stepped-up basis, where the value of the property on the date of your death becomes the child's basis. So, if the property has a market value of $250,000 at the time of your death, your child could sell the home for $250,000 and not be responsible for capital gains tax.

It has been suggested that the stepped-up basis rule could be modified in the future. Since tax rules do change, it is important to consult with a qualified tax specialist before making any decisions.

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  2. U.S. House of Representatives, Office of the Law Revision Counsel. "26 USC 1015: Basis of Property Acquired by Gifts and Transfers in Trust." Accessed Jan. 21, 2020.

  3. Internal Revenue Service. "Topic No. 409 Capital Gains and Losses." Accessed Jan. 21, 2020.

  4. Internal Revenue Service. "Topic No. 701 Sale of Your Home." Accessed Jan. 21, 2020.

  5. Journal of Accountancy. "Income Tax Consequences of Certain Gift Transactions." Accessed Jan. 1, 2021.

  6. H&R Block. "What Gift of Equity Tax Implications Are There If I Buy a House Below Value?" Accessed Jan. 1, 2021.

  7. U.S. House of Representatives, Office of the Law Revision Counsel. "26 USC 1014: Basis of Property Acquired From a Decedent." Accessed Jan. 21, 2020.

  8. Congressional Budget Office. "Options for Reducing the Deficit: 2019 to 2028," Page 229. Accessed Jan. 21, 2020.