gifting

4 Questions to Ask Before Leaving Your House to Your Kids

Dan Rafter — Mon, 19 Jun 2017 08:30:15 +0000

You might consider it the perfect gift: You are ready to move out of your home and downsize into a smaller condo or move into an assisted-living facility. Instead of selling the house, you'd like to gift it to one or more of your children.

This is a generous act, but it also comes with some serious consequences. In most cases, if you want to leave your home to a relative, it's best to do so as an inheritance after you die rather than as a gift.

Before you gift your residence, consider these key factors.

The big tax implications

Gifting your children your house might eventually leave them with a big tax bill. The reason is something known as the home's tax, or cost, basis.

How does tax basis work?

When you gift a home to a relative, the original cost of the home is now also considered the cost basis for the person to whom you are giving the residence, even though this person isn't paying anything for it. For instance, if you give your child a home on which you spent $170,000 10 years ago, that property's tax basis remains $170,000, even if an appraiser would determine that the residence is worth $270,000 in today's housing market.

If you give a home to your children as part of your inheritance after you die, though, the tax basis is whatever the home is worth in the current market. Even if you only spent $170,000 on your home, the tax basis of the property would be considered $270,000 if that is what it is worth today.

This subtle difference can have a big impact on the person to whom you've gifted your home.

What about the capital gains taxes?

If your children decide to sell the home you gifted them right away, they could face a big tax hit. If the home's tax basis is $170,000 and your children sell it for $270,000, they'll have to pay capital gains taxes on the profit — in this case $100,000. If you had left the home to your children as part of their inheritance, they could have avoided these capital gains taxes. That's because the tax basis would have been $270,000. If they then would have sold the home for that same figure of $270,000, they would not have had to pay any capital gains because officially the house sale would not have generated a profit.

Your children can avoid capital gains taxes by living in the house that you have gifted them for at least two years before selling it. In this case, your children can skip capital gains taxes on up to $250,000 in profits from the sale of the home. Couples can skip paying capital gains taxes on up to $500,000 on a home they sell if they have lived in it for at least two years.

If you don't know if your children will actually live in the house for at least two years before selling it, leave the home to them as part of their inheritance. It's the better financial move for them.

Is the timing right?

There are times, of course, when you simply can't hold onto a house so that you can leave it to your children as part of their inheritance. In such cases, gifting the house might make sense.

Say one of your children desperately needs a place to live now. Waiting until you die to pass the home to this child won't be much of a help.

Or what if you are moving into assisted-living and can no longer maintain your home? Letting it sit vacant might speed up its deterioration. Your children might be willing to maintain the home until you die and it passes to one of them through an inheritance. Or maybe they'd rather not. Gifting a home to one of your children might be the best way to keep the home in the family.

Are you gifting the mortgage, too?

Gifting becomes more complicated if you still owe mortgage money on the home. That mortgage won't disappear simply because you are gifting the home to one of your children.

The person receiving the home will be responsible for paying the mortgage each month. Make sure this is a financial responsibility that the child receiving the home is willing and able to take on.

Some mortgage lenders might "call in" your mortgage loan when you gift the house. This means that either you or your child must pay whatever the balance is on your mortgage. If this is a small amount, it might not matter. But if you owe a significant amount on your loan and neither you nor your child can pay it, the mortgage lender will have the right to foreclose on your property and take ownership of it.

Make sure that either you or the child who receives the home is able to take care of any mortgage issues.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Budgeting Hack: Gift Calendars

Nora Dunn — Mon, 04 May 2009 07:33:31 +0000

I do it all the time. I figure I’m right on track with my budget. I’m so proud of my budgeting prowess. Until…my friend’s birthday comes and goes. Then an anniversary, Mother’s Day, a few more birthdays, more holidays yet, and of course – the ever-present Christmas. When I’m left to pick up the pieces at the end of the year, I wonder what happened to my excellent budget. That is, until this year: I started keeping a gift calendar.

Planning out gift giving occasions on the calendar not only helps to create an accurate budget, but it is also a great way to organize yourself. Until recently, the birthdays of my friends and family were either committed to (my rather shady) memory, or scribbled on a piece of paper I inevitably forgot to reference in time. And missing a birthday or (gasp) an anniversary is rarely a good thing.

The premise is easy. Simply sit down with the following:

Monthly Calendar
Pen/Pencil/Markers
Your Budgeting notebook/spreadsheet

Brainstorm all the gift-giving occasions you can think of. Be sure to include all the standard holidays, for example:

Valentine’s Day
Easter
Mother’s Day
Father’s Day
National Holidays
Thanksgiving
Christmas

Then concentrate on birthdays:

Mum
Dad
Kids
Siblings
Other Relatives
Friends

Mark these gift-giving occasions on your calendar, and write them in your budgeting notebook or spreadsheet, leaving space to fill in specific gift suggestions and price tags. Your gift suggestions and price tags will likely be a work-in-progress throughout the year. But for initial budgeting purposes, fill in amounts that are reasonable estimates given the occasion.

This exercise is not an invitation to find more opportunities than normal to buy stuff and stress your budget! So if you wouldn’t normally give your friend a birthday present, don’t put it in the gift calendar budget. It will still be nice to remember the occasion now that it is marked on the calendar. However if you know that a celebrative evening could entail a night on the town, you may want to include this expense in your gift-giving budget if it is not worked in somewhere else.

As another example, if on Thanksgiving you don’t tend to give gifts, consider the expense you might bear bringing a nice bottle of wine over to a Thanksgiving dinner, or even hosting the dinner itself. What about decorations? If there is an expense associated with that holiday that makes sense to incorporate into your gift calendar budget, then do so.

Even with this level of planning, your budget can still go completely awry with unexpected gifts. So, while you are brainstorming, build a contingency into the budget for those gift-giving occasions you can’t anticipate, for example:

Birthday gifts for parties your child attends
Office pools for retirements, maternity leave, etc
Gifts for new friends (birthdays, baby showers, etc)
Wedding & Engagement gifts
Condolence & Get Well gifts

Since you can’t accurately anticipate the cost of these unexpected gifts, it is best to air on the side of caution. Better to overestimate a budget and come in under than it is to underestimate and have a nasty surprise.

Gift calendar budgeting is an activity the whole family can participate in. Kids will enjoy coloring each day of celebration in the calendar, and teenagers can help with budgeting and gift selection as part of their own financial education.

Using a Gift Calendar is also a great way to schedule out your year. With these events clearly laid out, you can avoid unwittingly scheduling in conflicts – or at least forgetting to call on the big day. And with a decent budget in place to help you stay on track, you can use your gift calendar to proudly eliminate one of the biggest budgeting pitfalls.

This article is from Nora Dunn of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Dissecting "Gift Guilt" - When Does Receiving a Gift Make You Feel Bad?

Xin Lu — Sat, 08 Mar 2008 06:06:25 +0000

Ever since I was a child, I have been taught that when you receive a gift you should be happy about it and then give something back in return. To this day I still believe that is good manners, but sometimes receiving gifts is stressful for me because of what I call "gift guilt". Read on to see what I mean.

The most common kind of gift guilt occurs when someone gives me something but I do not have something to give back or I did not intend to buy a gift for that person. This has happened a few times at work, and most of the times I just said thank you and carried on. I think this is the easiest type of gift guilt to deal with because I can just give something in return.

Another type of gift guilt is when I sincerely do not want or cannot use the gift. For example, I have received clothes from relatives in China that I cannot wear. I could not send the clothes back or return them to a store so they were given away to random people. It is sad that I cannot appreciate the gift, but sometimes that is how thing are, and I feel guilty for not liking or using a gift.

Then there is the unsettling guilty feeling brought on by an extremely large gift. I feel indebted to people when they give me gifts with a large monetary value, and if the gift came from someone I barely know I would probably return it just to feel at ease. Maybe I am just paranoid, but I suspect that accepting a ginormous gift from an acquaintance could come back and bite me.

The worst kind of gift guilt I get is when friends in debt give something to me. I do appreciate the gesture, but I feel bad about it because I feel that their need for the money is more than my need for a gift. At the same time it is also hard to say "I cannot accept this gift because I know you need the money to pay off your debts." That just sounds really condescending, but sometimes I really do feel like screaming, "pay off your credit card bills first before you give me something!" I think this way because I do care about them, but it is hard for me to say it out loud.

With that said, I do like giving gifts more than receiving them because there is less paranoia and guilt involved and I have never regretted giving out something. Perhaps I just think too much about this, and I should always just say thank you and move on, but sometimes I just cannot help feeling guilty about receiving something. Have you ever felt weird about receiving an undesired, unexpected, or unnecessarily generous gift? What did you do about it?

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This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: