REAL ESTATE MATTERS: Parents worry about tax burden of selling property to child
The reasons for transferring ownership to children vary.
Q: I have lived in my parents’ house for the past 19 years. I’ve been paying rent the entire time. They want to sell it to me for less than the market value but are afraid of the huge capital gains taxes. The home was purchased 19 years ago for $120,000 and the home has doubled in value. If they sell the home to me under the market value, are they still responsible for capital gains taxes on the market value?
A: It’s quite nice of your parents to want to transfer ownership of the home to you after all these years, and at a significantly reduced price. We assume your parents want to sell you the home and fix the sales price to equal the price they paid for it. They paid $120,000 and want to sell it to you for $120,000, which would give them their original investment back and not trigger the payment of any taxes on the profits from the sale of the home.
There are a number of different ways of thinking about this purchase/sale for you and for them. You could say that your parents want to sell the home to you for $120,000 and give you a gift of $120,000. This gift represents the increased value of the home over the last 19 years. We don’t see anything wrong with them giving you the gift. In fact, over the years we’ve written a number of columns on how parents can give a home to their kids as a gift.
You can give anyone a financial gift of up to $15,000 without triggering a “taxable event,” as the accountants like to call it. So, your parents could give you a gift worth $30,000 a year. If you’re married, they could give you and your spouse $60,000 a year. If you have two children, they could gift you up to $120,000 without triggering any taxes.
The reasons for transferring ownership to children vary. Sometimes parents move out of their homes (or buy a second home), move away and want the home to stay within the family. In other cases, as parents age, they put their kids on the title with themselves to make sure the home transfers to the kid once they die.
There are quite a number of different tax scenarios, but we’ll focus on two of them in responding to your question.
- The first is the issue of paying federal income taxes or capital gains on the sale of the home from your parents to you. If your parents sell you the home for $120,000 and they have no profit on that sale, they won’t pay any capital gains or federal income taxes on the proceeds. In other words, if they sell the property for what they paid – even adding in the cost of any mechanical or structural work that was done – they won’t owe any taxes on the proceeds.
- At the same time, your parents have effectively given you a gift of $120,000. As we just noted, for federal income tax purposes, your parents can each give you $15,000 without triggering any federal tax reporting or affecting any estate tax issues. Thus, your parents’ gift of $30,000 has no impact on you or your parents’ federal income or estate/gift tax returns.
The $90,000 would get reported to the IRS as a gift to you, but they would not have to pay any gift taxes on that amount. The gift tax form would just reduce the lifetime amount your parents can give you by $90,000 without paying estate and gift taxes. Currently, your parents can each give you $11,700,000 each, for a total of $23,400,000, during your lifetime without paying any federal estate or gift taxes.
At these limits, most parents can transfer to their kids a huge sum of money and assets without paying any federal taxes on that money. If your parents fall into this category of owning less than $23,400,000 in assets, they are likely never going to be impacted by giving you a $90,000 gift.
Please note that this number is indexed for inflation, but is scheduled to revert to a much lower number at the end of 2025. Thanks for your question. We hope moving from renter to owner works well for you.
