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We are in our 80s and want to transfer ownership of some homes to our children. How should we do this in a tax-advantageous way?

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By CD Moriarty

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  • What other financial gifts are you giving your children? 

Financial decisions affect family relationships. Remember that once the property is titled in their name, your adult child can do anything with it. Think about how watching their decision-making could affect you.

It’s essential to communicate your expectations. I witnessed a young couple sell a home that was gifted to them by my client. The couple then bought a bigger home and asked the parents to contribute financially to this new property so they could improve it. This left the parents in frustrated and unable to say no. However, the young adults could not manage the added expenses of a bigger home and were plagued with debt. The parents were filled with disappointment.

How to transfer property

If your goal is to save your children money on taxes, then the best course typically is to wait until you die and let them inherit the homes. They will acquire ownership at the home’s market value at the time of your death, rather than gifting now, when their cost basis will begin with the price when you purchased the home. This is important for calculating capital gains whenever they sell.

Under today’s rules – which adjust for inflation and sometimes get reduced by legislation – you can pass on $12.06 million ($24.12 million for a couple) free of federal estate taxes.

Read: The IRS just made it easier for families to pass on millions of dollars to their children and others

The value of the home will be “stepped up” upon death and will become the starting point (the “cost basis” to the IRS) for calculating any capital-gains taxes whenever they do sell.

Read: Here’s how you can save money on capital-gains taxes when you sell your home

Even if your estate is far below the federal tax-free limits, your estate and gifting may be subject to state taxes . Eleven states have an estate tax, and they start as low as $1 million; five levy an inheritance tax.

If you want to gift the houses all at once before you die, it may still be gifted tax-free, but you will need to file IRS form 709 for the tax year of the title transfer. The amount you gift will be reduced from your tax-free limit for estate taxes when you die.

Keep in mind that this form is required whenever you gift more than $16,000 (2022 limits) to one person in a year.

There are many ways to transfer a title besides all at once. There are real estate trust options guaranteeing the transfer at your death. For example, by setting up a revocable trust to benefit your child and putting the specific property into now, you will guarantee they receive the property they live in. It also allows you to retain control of the property should you need to sell, get a loan or charge rent to cover medical care as you age.

Another example, some parents transfer a title over time. As a couple, you could transfer up to $32,000 a year to each child ($16,000 from each of you) or $64,000 if you also made a similar gift to the partner or spouse. Again, these are 2022 limits. 

This approach gives you more flexibility overall for your estate planning. You can do this with any asset, and your decision does not have to be all or nothing. 

To transfer the title in a home over time, the title will need to be changed each time you gift and must be noted with government record-keepers where the property is located. Please consult legal advice to be sure this happens correctly.

Finally, be sure to consult your lawyer about the impact on your estate and any changes that will be needed to your will and other documents. Talk to your accountant to make sure you comply with tax laws.

Then make the best decision for the two of you.

<EMPHASIS>CD Moriarty is a certified financial planner, a columnist for MarketWatch and a personal-finance speaker. She blogs at <INTERNET LOCATION="EXTERNAL" URL="https://www.moneypeace.com/">MoneyPeace</INTERNET>.</EMPHASIS>

Learn how to shake up your financial routine at MarketWatch’s Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. Join Carrie Schwab, president of the Charles Schwab Foundation.

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