Are you planning on gifting a home to someone this holiday season? For most people, a gift this generous is probably out of the question. But maybe you had a good year financially, and a family member needs the help. Whatever the case is, here are some guidelines when it comes to giving the gift of real estate.
Buying a new home outright
Instead of buying a new home outright, it may be wise to gift the cash for the home, NOT the home itself. Everyone has their own preferences when it comes to what they want in a home, so allowing the recipient of your generous gift to choose their home is probably a much safer idea.
We highly recommend running this by your accountant, as you may also need to file a gift tax return.
Gifting the down payment
Gifting money for a down payment works in pretty much the same way—except when it comes to the mortgage. If there’s even the slightest hint that the money is a loan rather than a gift, it can hinder the recipient’s ability to get a mortgage.
You’ll want to work closely with the recipient’s lender to file the appropriate paperwork, which will include a verified gift letter certifying the funds are a gift, not a loan. The lender will also likely need to examine your finances to determine if you’re able to gift. And remember, most lenders won’t permit gifts from nonfamily members.
Gifting an existing home
Would your children love to own the home they grew up in? Unfortunately this is a poor option, especially if both parents are still living.
One of the tricky struggles with gifting a home you own is the differential between the cost basis (what you first paid for the house) and the current fair market value—which could be hundreds of thousands of dollars, depending on how long you’ve owned it and the appreciation in the area.
This might not matter if your children plan to live in the home forever: The gift will be subject to your gift tax limit, and they’ll only pay capital gains tax if they sell. But if (and, likely, when) they sell, they’ll be stuck paying taxes on the difference.
If you’re determined to gift someone a home this holiday season, remember to keep these guidelines in mind. It IS possible, but of course it’s extremely important to consult your accountant and/or financial advisors to ensure it’s done in the right way.