Can Parents Gift a House to Their Child?

Parents can gift a house to their child, a process involving a formal transfer of property ownership. This transfer necessitates careful consideration of financial and legal implications for both parents and child. Gifting real estate can have lasting effects on taxes, future financial planning, and eligibility for certain programs.

Understanding Gift Tax Implications

Gifting real estate, like any other asset transfer, is subject to federal gift tax rules. A “gift” for tax purposes is defined as any transfer of money or property to an individual where nothing, or less than full value, is received in return. The tax is typically imposed on the donor, not the recipient.

The annual gift tax exclusion allows an individual to give away a certain amount of assets each year without reporting it. For 2025, this annual exclusion is $19,000 per recipient. If parents are married, they can combine their exclusions, effectively gifting $38,000 per child in 2025 without filing a gift tax return, a concept known as “gift splitting.”

Gifts exceeding the annual exclusion count against an individual’s lifetime gift tax exemption. This exemption is the total amount of gifts an individual can make over their lifetime, beyond annual exclusions, without incurring federal gift tax. For 2025, the federal lifetime gift tax exemption is $13.99 million per individual, or $27.98 million for a married couple. While a gift exceeding the annual exclusion reduces this lifetime exemption, it does not immediately trigger gift tax unless cumulative lifetime gifts surpass this threshold.

Even if no gift tax is immediately due, a gift exceeding the annual exclusion requires the donor to file IRS Form 709. This form informs the IRS that a portion of the lifetime exemption has been used. The responsibility for filing Form 709 rests with the donor, and it is due by April 15 of the year following the gift. A few states may also impose their own gift taxes.

Executing the Property Transfer

The legal transfer of a house from parents to a child involves procedural steps to ensure valid ownership change. The most common method for transferring real estate is through a deed, a legal document conveying ownership rights. The choice of deed type determines the guarantee the grantor provides regarding the property’s title.

A quitclaim deed is used for property transfers between family members or when no money is exchanged, offering the least protection. This deed transfers whatever interest the grantor holds, without guaranteeing clear title or protection against claims. In contrast, a warranty deed provides the highest protection, with the grantor guaranteeing clear title and defending against claims. A special warranty deed offers a middle ground, assuring no title issues arose during the grantor’s ownership. For a family gift, a quitclaim deed is often sufficient due to the relationship.

Regardless of the deed type, the document must contain essential information for legal validity. This includes identification of the grantor and grantee, a precise legal description of the property, and language indicating transfer. The street address alone is not enough; a detailed legal description is required. The deed must be in writing and signed by the grantor in front of a notary public.

Once the deed is drafted, signed, and notarized, it must be delivered to and accepted by the child. The final step is recording the deed with the local government office where the property is located. Recording the deed provides public notice of the ownership change, protects ownership rights, and establishes a clear chain of title. While title legally transfers upon delivery and acceptance, recording is essential to safeguard interests and prevent disputes.

Implications for Cost Basis and Property Taxes

Gifting a house to a child has implications for the child’s cost basis in the property and its future property tax assessment. The cost basis is a figure used to calculate capital gains or losses when the property is sold. For gifted property, the child receives a “carryover basis,” meaning their cost basis is the same as the parents’ original basis. This differs from inherited property, which receives a “stepped-up basis” to its fair market value on the date of the original owner’s death.

The carryover basis rule can impact potential capital gains tax if the child later sells the house. If the parents’ original purchase price was low and the property has appreciated in value, the child’s capital gains upon sale will be calculated from that lower original basis, leading to a larger taxable gain. For instance, if parents bought a house for $100,000 and gift it when it is worth $500,000, and the child later sells it for $600,000, the child’s capital gain would be $500,000 ($600,000 sale price minus the $100,000 carryover basis). Understanding this carryover basis is important for financial planning and tax obligations.

Beyond capital gains, gifting a property can also affect property tax assessments. Property taxes are levied by local governments based on the assessed value of the property. In some jurisdictions, a change of ownership, such as through a gift, can trigger a reassessment of the property’s value for tax purposes. This reassessment could lead to a higher property tax bill for the child. Investigate how a gifted transfer might impact ongoing property tax obligations, as specific rules vary by state and locality.

Additional Financial and Legal Aspects

Beyond direct tax and transfer considerations, other financial and legal factors warrant attention when parents gift a house to their child. One aspect involves existing mortgages on the property. If the gifted house has an outstanding mortgage, the mortgage agreement contains a “due-on-sale” clause. This clause allows the lender to demand immediate repayment of the entire loan balance upon transfer of ownership. Consult with the mortgage lender before initiating the transfer to understand their policy and avoid triggering this clause.

Gifting an asset can also impact the parents’ future eligibility for certain government assistance programs, such as Medicaid. Medicaid has a “look-back period,” 60 months (five years), during which asset transfers for less than fair market value are reviewed. If a property is gifted within this period and the parents later apply for Medicaid long-term care benefits, the transfer could result in a penalty period of ineligibility.

The transfer may also affect existing benefits, such as homestead exemptions. Homestead exemptions can reduce the taxable value of a primary residence. If the parents were receiving such an exemption, it would cease upon transfer, and the child would need to apply for any eligible exemptions. Before any transfer, conduct a title search to ensure the property has a clear title and no outstanding liens. Title insurance can provide protection against unforeseen title defects or claims.