It’s natural to want your hard-earned money and assets to go to your children after your death. But even if you don’t know much with regard to finances, you probably know that gifts to loved ones often come with unforeseen taxes.
In an effort to keep things simple and reduce their children’s future tax burden, some people decide to sell their homes to their children for just a dollar. As you’ll see below, though, doing so is a bad idea, and there are much safer options to pursue instead.
Why Selling for $1 Is a Bad Idea
Any time you sell a house, there are taxes involved. As such, if you sell your home for much less than market value (in this case, for $1), you would assume you can avoid both excessive sales tax and gift tax. However (and unfortunately), that’s not how it works.
If your home is worth $400,000 and you sell it to your child for $1, the IRS will see the remaining $399,999 of the home’s value as a gift, which means that gift tax will be owed on that amount. Gift taxes can be as high as 40%, and that’s a scenario you and your children will no doubt want to avoid.
What can you do instead?
Fortunately, there are other tax-advantaged options for passing your home on to the next generation of your family. While you should always discuss your specific situation with an estate planning attorney, these are a couple of alternative options to consider:
Let Your Child Inherit the House
Inheritance is a viable option if you plan to live in your home up until your death. Typically, estate taxes have to be applied before your children receive their portion. But thanks to the Unified Federal Gift and Estate Tax Exemption, you can exclude a certain amount from the taxable value of your estate.
As of 2023, that amount is $12.92 million, which means your child can inherit the house without having to pay gift tax or estate tax so long as it is worth less than $12.92 million. If it’s worth more, your child only has to pay tax on the value past that initial $12.92 million.
Estate Planning Done the Right Way
As you’ve seen, “conventional wisdom” around estate planning is often anything but. Even if you aren’t leaving your loved ones a vast inheritance, the help of a skilled estate planning attorney is absolutely essential if you want to give yourself peace of mind in life and ensure a smooth distribution of assets after death.
At OC Wills & Trust Attorneys, we’ve been helping Orange County residents like you plan for the future since 2008. Every person’s estate is unique, and that means everyone should have an estate plan reflecting their individuality. If you need to create your estate plan or update the one you have, get in touch with us to set up a consultation today.
