Most parents look for a way to provide for their children, even adult children. We work with rental property owners in the greater Williamsburg area, and we can help you seamlessly transition your rental property to your heirs. While giving a property to your children can often have tax consequences, there are ways to ease that burden. The best method to use will depend on your individual circumstances and needs. Here’s a guide to get you started.
Giving the Rental Property as a Gift
Handing over a rental property is a generous gift. It sets your children up for long-term success by giving them a valuable asset that they can use to generate short-term cash income and long term returns. However, there will be tax consequences. When you give anyone other than your spouse property valued at more than $15,000 ($30,000 per couple) in any one year, you have to file a form that identifies the gift. As the parent, you can gift a total of $11.7 million (as of 2021 tax law) over the course of your life without incurring a gift tax. If the home you’re giving to your child is worth less than $11.7 million, you will likely not have to pay any gift taxes, but you will still have to file a gift tax form.
While you are protected from a gift tax, your children will likely face a capital gains tax when they sell the home. This is an excellent reason for them to hold onto it. Gifted properties from parent to child do not come with a step-up, which is a tax protection on inherited homes. So when you give a rental property to a child, the tax basis for the recipient is the original cost of that property.
Sell the Rental Property to Your Children
You can also sell your house to your children. When you sell it at a ridiculously low price point, the IRS will take notice. The difference in price between market value and your sales price will be considered a gift.
So, it may be a better idea to sell them the house at its full market value. You can do this while holding a note on the property that you’re transitioning to them. It will have to include interest, and you can use the annual gift tax exclusion to give your children $15,000 a year to pay down that note. Talk to an attorney and a tax accountant to make sure all the details are compliant with tax law. This will require a lot of maneuvering.
Put the Property in a Trust
Another option when you’re transitioning a rental property from your ownership to your child’s is to put that home in a trust. If you put it in an irrevocable trust that names your children as beneficiaries, the property won’t be considered part of your estate when you die. So, there won’t be any estate taxes to pay when it’s transferred
Once you put the house in the irrevocable trust, it must stay there until your death. You can sell it, but the money you earn on that sale will then remain in the trust.
As you can see, transitioning your rental property to a child or your children isn’t as easy as handing over the deed. Figuring out the best way to pass property to your children will depend on your individual financial circumstances. We’d be happy to review your situation and give you our best thoughts as well as discuss our management services. Contact us at Berkeley Realty Property Management.