Transferring Property Ownership to Family, Charity, and More
As you think about and prepare for estate planning, you may be asking yourself, “Is it possible to transfer ownership of my house without selling?” After all, your home is an incredibly valuable asset that can provide significant value to a loved one or charity. If you can donate it without selling it first, you’re sure to save money, right? That may be true.
But where do you begin, who needs to be involved, and at what point should the transfer of property happen? Here’s what you need to know.
How to transfer property ownership
Before you can transfer property ownership to someone else, you’ll need to complete the following.
Identify the donee or recipient
Discuss terms and conditions with that person
Complete a change of ownership form
Change the title on the deed
Hire a real estate attorney to prepare the deed
Notarize and file the deed
While the steps above may seem simple enough, a lot of thought and planning should go into your approach. There are many deeds available to you, and their benefits vary.
Deeds to consider when gifting property
Before you begin filling out a property transfer form, consider who you are gifting your property to. Will it go to a family member or loved one? A charity? Deed requirements not only differ based on the type of deed, but they also differ depending on which state you live in, so be sure you are using a deed form that is specific to your state.
Here are a few popular options to consider when transferring property ownership to a family member or charity.
Transfer on death deed
The transfer on death or TOD deed, sometimes called a beneficiary deed, provides you with full control of your property while you’re alive, but transfers it to a selected individual when you die. This means you can avoid paying a gift tax because the transfer is revocable or not immediate. You can also change your mind at any time, in the event you want to change beneficiaries.
It’s also a very strategic option for your loved one because it keeps them from having to go through probate. Though it does have some cons tied to it, mainly if there is a mortgage on your home, the TOD beneficiary will inherit the responsibility of paying the mortgage. Secondly, it is not available in every state. You’ll need to speak with a real estate attorney to find out if a transfer of death deed is an option for you.
A gift deed voluntarily transfers title to real property from the owner (during his or her lifetime) to a family member or charity. It’s a preferred option for property owners who want to make a delayed gift.
Like TOD’s, gift deeds are revocable. Though they can be irrevocable, too — meaning it’s documented immediately, making the donee or recipient the new legal owner upon receipt of the document.
To be considered a gift, the deed must contain language that explicitly states no compensation is expected or required. The donor is responsible for paying the Federal Gift Tax, as well as the State Gift Tax, if applicable. More on that below.
Tax consequences and implications
Even gifts and donations come at a cost when donating property. So, you need to understand the taxes associated with transferring property ownership.
Gift taxes for donors
The IRS implements a Gift Tax to the donor on any transfer of property from one individual to another. This tax essentially prevents taxpayers from gifting their money and items of value to others to avoid paying taxes. As gift tax regulations can be very complicated, it is best to check with your respective tax authorities if you have given anyone a gift valued at more than $15,000 — which is the 2019/2020 annual gift exclusion.
Capital gains tax for recipients
As far as tax implications for recipients go, when the time comes to sell the home, you could be looking at paying a capital gains tax. In other words, if you sell an asset that is worth more than you paid for it, you will have to pay taxes on the gain.
Here’s how it works. When you sell the property, you calculate your gain or loss by taking the sales proceeds and deducting the selling expenses. Once you have done that step, you then deduct your “basis.” The basis consists of the asset’s cost, though it also includes the cost of any major improvements.
But here is where it gets complicated — since a family member transferred the property to you, there is no cost to you. So, the tax is based on their cost, meaning you’ll need to find out what your family member paid for or how they acquired the property. Chances are — if it’s an older relative — they spent a lot less for the home than its current value. This means you could be facing a considerable capital gains tax. For 2020, the long term capital gains tax can be as high as 20%.
Transferring title vs. inheriting property
What if instead of transferring the title, you leave your property as an inheritance for a loved one — is that easier for both parties? Possibly. The most important question you can ask to find the right answer is: “does my loved one need the property now, or can this person wait until I pass?”
If your recipient can wait, inheritance certainly makes understanding your capital gains tax easier, as the IRS will consider the property’s fair market value at the time of the donor’s death.
Consider this example, as explained by the experts at Symphony Financial Planning
You purchased land for $25,000. It is now worth $250,000. You donate the property to your child (and are not required to pay gift tax). This means your child will take on a tax basis of $25,000. If your child sells the land for $250,000, your child would have taxable gain of $225,000 ($250,000 sales proceeds minus $25,000 basis).
On the other hand, if you transfer the property to your child at your death (when the land is worth $250,000 — the fair market value), your child would have a tax basis of $250,000. If your child sells the land for $250,000, your child would have no taxable gain ($250,000 sales proceeds minus $250,000 basis).
In the example above, your child is not liable for paying a capital gains tax, which makes the property gift significantly more valuable.
The bottom line
Donating and receiving real estate is a kind gesture, but it can come at a cost to both the donor and recipient. It’s important to do your research on property transfers so you can plan ahead from a tax perspective. Be sure to talk to an attorney licensed in your state to understand which option is best for you.