With home ownership seemingly out of reach for many young people today, parents may wonder whether they should just give their house to their children at some point? It might be a consideration, for example, if the parents plan to downsize to a new condo or make a former vacation home their full-time residence. However, while such generosity may be admirable, giving a house away is a decision with serious financial consequences for everybody concerned.
4 Reasons You Might Not Want to Hand Over the House
Before you sign over the homestead to your adult child, consider these factors, which could make you think twice about doing so.
1. You May Need the Money One Day
Aside from the funds you have in your retirement accounts, your home equity could be the largest asset you possess. If you give up your house, you won’t be able to sell it and harvest the cash or take out a reverse mortgage to borrow against your accumulated equity should you ever need to. Even if you are financially comfortable now, a large medical or nursing home bill late in life could leave you scrambling to come up with money to pay it.
2. You Could Be Giving Your Child a Huge Tax Bill
If you give your house to your adult child while you’re still living, their tax basis will be the same as yours: whatever you paid for the home plus the cost of any improvements you’ve made over the years. So, for example, if you bought your home 20 years ago for $300,000 and redid the kitchen to the tune of $50,000, your cost basis is $350,000.
However, if you leave the house to your adult child in your will, rather than making a gift while you're still alive, the cost basis will step up to the home’s fair market value at the time of your death.
Let’s say your house is worth $700,000 today and will be worth $1 million in another 10 years. A child you give the house to, and who later sells it for $1 million, will owe tax on a gain of $650,000. If they inherited the property instead, the taxable gain would be only $300,000.
In both cases, the child could generally exclude some of that gain by living in the home for at least two years before selling. The exclusion is $250,000 for an individual, $500,000 for couples who file a joint return. But even so, the difference in taxes could be substantial.
3. Your Mortgage Might Be an Obstacle
With more Americans carrying mortgage debt into their retirement years, you might still have a loan on your home by the time you consider giving it to a child. If your mortgage is transferable, your child will become responsible for it, which could be a financial burden. If it isn’t transferrable, your child might have to refinance that debt, which might be even more expensive—or impossible, if your child does not have a strong credit history.
4. You Might Still Want to Live There
For estate planning purposes, you might consider giving your house to a child even if you plan to continue living in it. One reason is estate taxes. In 2021, federal estate taxes only affect estates worth $11.7 million or more, so unless you own a mansion, that may not be an issue. Your state, however, may set a lower threshold. Massachusetts and Oregon have the lowest exemption levels at $1 million.
If you do want to give your house to a child and still reside there, consult an estate-planning attorney about your options, including putting your home into a trust. One type, the qualified personal residence trust, could also allow you to freeze your home’s value for estate tax purposes, so you wouldn’t have to worry about future appreciation pushing you into estate tax territory.
Of course, there any number of potential downsides to becoming your child’s tenant. One is the potential for a family rift if you disagree on matters like home maintenance or who is responsible for what. And even if you and your child have an ideal relationship, you could find yourself at the mercy of a less-agreeable son- or daughter-in-law someday—perhaps someone who isn’t even in the picture yet.
The Bottom Line
Giving your home to your grown-up child is not a decision to be taken lightly. It is in your and your child's best interests to consider all of the financial ramifications of such a move. Consult with a financial planner and an estate planning attorney if you plan to remain living in the home. These steps will help ensure that you make a decision that works for everyone.