How Gifting Versus Selling Your Home Can Be a Tax Dream or a Tax Nightmare – Part 3
Money Matters – Skloff Financial Group Question of the Month – July 1, 2024
By Aaron Skloff, AIF, CFA, MBA
Q: We read ‘How a Gift Can Be a Tax Dream or a Tax Nightmare’ Part 1 and Part 2. We also read ‘How To (Legally) Avoid Taxes When Selling Your Home’ Part 1, Part 2 and Part 3. Lastly, we read ‘How Gifting Versus Selling Your Home Can Be a Tax Dream or a Tax Nightmare’ Part 1 and Part 2. We are considering gifting or selling our home to our child and their spouse. Can you give examples of the tax implications of gifting versus selling a home?
The Problem – How Gifting Versus Selling Your Home Can Be a Tax Dream or a Tax Nightmare
Many people gift or sell their home to their child and child’s spouse without realizing the tax or implications to all parties. When executed correctly, the transaction can be a tax dream. When executed incorrectly, it can be a tax nightmare.
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The Solution – A Side-by-Side Comparison of Gifting Versus Selling Your Home to Your Child and Child’s Spouse
By examining side-by-side comparisons, you can see how you can pay high, low or no taxes based on the scenario.
Gifting Your Home Can Generate Tax Detriments to You, Your Child and Their Spouse – A Tax Nightmare
If you and your spouse gift your $600,000 home (with a $100,000 costs basis) to your child and their spouse, you also gift them your cost basis (or Adjusted Basis), which becomes their cost basis (or Adjusted Basis). By gifting you lose your capital gain exclusion you would have realized had you sold your home to your child and child’s spouse. – a tax nightmare. Based on when your child and child’s spouse (“They”) sell that home, they will pay: high taxes (see the red section, danger zone, of the table below), low taxes (see the yellow section, safe zone) or no taxes (see the green section, ultra safe zone).
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Selling Your Home Can Generate Tax Benefits to You, Your Child and Their Spouse – A Tax Dream
If you and your spouse sell your home for $600,000 (with a $100,000 costs basis) to your child and their spouse, and meet the Eligibility Test, your gain is exempt from taxes – a tax dream. Based on when your child and child’s spouse (“They”) sell that home, they will pay: high taxes (see the red section, danger zone, of the table below), low taxes (see the yellow section, safe zone) or no taxes (see the green section, ultra safe zone). The last scenario is a tax dream.
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Action Steps
Work closely with your Registered Investment Adviser (RIA) to reduce your taxes, and grow and preserve your wealth.
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm specializing in financial planning, investment management and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.
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