Leaving a legacy is one of the best things you can do for your child and other members of your family. You can leave anything of value for your legacy.
If you are a real estate investor, you can leave your child and other family members one or more of your rental properties.
Selling or Gifting a Rental Property to your Child or Family Member is a great thing to do for them and puts them on a path toward wealth creation and financial freedom.
The decision to gift, transfer, or sell your rental property is ultimately yours. There are many things for you to consider. The process can be confusing, especially if you are not sure if you are making the right decision.
There are state and federal taxes you must handle. Plus, there are estate planning implications that will come into play in your decision.
An in-depth discussion about these issues is beyond the scope of this article. Always talk to your accountant and real estate attorney before you start this process.
Here is some basic information to help you get started with this process.
Gifting Rental Property to Your Child
There are a couple of financial benefits to gifting a rental property to your minor or adult child. The last thing you want to be concerned about is your child’s future.
Giving your rental property to your child as a gift will help financially secure their future. Your child will benefit from the monthly rental income the property generates. If your child decides to sell the property, they can get a large lump sum of money that they can use for other purposes.
When you gift your child a rental property that has a value of less than $11.7 million as of 2021, you may not have to pay gift taxes. Yet, you still need to file a gift tax form. Your child may likely face capital gains taxes with the rental property gift.
Talk to your accountant about the tax implications of gifting your rental property to your child.
How to Gift a Rental Property to your Child
The best way to gift a rental property to your child is to put the rental property in your will. Your estate will not pay taxes for any amount under $11.7 million as of 2021.
Having a rental property in your will also reduces the capital gains tax for your child. Every state treats estate taxes differently compared to the federal estate tax. Therefore, you will need to stay updated on the latest changes to the estate taxes in your state and talk to your real estate attorney.
You can help your child avoid paying estate taxes by putting your rental property in an irrevocable trust.
When you name your child as the beneficiary of an irrevocable trust, the rental property is no longer a part of your estate. The transfer of property to your child will not be subject to estate taxes.
You cannot remove a rental property when it is in an irrevocable trust. If you decide to sell the rental property, the money earned from the sale will go directly into the irrevocable trust.
A good financial planner and an attorney can help you set up an irrevocable trust.
Transferring a Rental Property to a Child
Transferring a rental property to your child has many of the same benefits as gifting. The process is different because it does not involve having a will or a revocable trust.
Instead, you will deal with one of many types of property deeds.
Signing the appropriate deed is necessary for the transfer to take place without any problems. There may also be some tax implications for transferring rental property to your child.
Always involve your accountant and real estate attorney in your decision for these issues.
How to Transfer a Rental Property to a Child
Each state may have a different process to allow parents to transfer rental properties to children because there are various property deeds. Some of the types of deeds you may encounter include:
- Quitclaim deed
- Gift deed
- Fiduciary deed
- Warranty deed
You will need to decide the form of title your child will hold on the property. Some common forms of real estate title include:
- Sole owner
- Trustee of a trust
- Joint tenants
- Tenants-in-common with other owners
- Community property
- Community property with the right of survivorship
Transferring a rental property to your child is a straightforward process. Otherwise, your child may face some consequences for an improper transfer. Seek the counsel of your real estate attorney to make sure they file the paperwork for this process correctly.
Can I Sell my Investment Property to my Child?
Laws regarding this situation will vary in each state and each jurisdiction within the state.
In California, a child under 18 or 21 can own property, including investment property. It is unlikely that a child under 21 years of age will have the money to purchase an investment property from their parents.
If a child wants to buy an investment property, they can do this jointly with one or both parents. The parent or legal guardian must sign all contracts on behalf of the child. Therefore, the child cannot directly purchase a property in their name.
Can I Give my Rental Property to my Child?
In California, you can give your rental property to your child as a gift or through a transfer. Minors under the age of 18 or 21 have restrictions on what they can do with the property.
Under California law, for example, a minor child who owns rental property cannot sell, borrow against, lease, or rent the property. For this reason, rental property held by a minor child is typically held in a trust by the trustee of the property.
When the child turns 18 or 21 depending on the jurisdiction, they will receive full title to the property.
California has an option for parents who do not want to set up a trust to hold a rental property for their children. It is the California Uniform Transfers to Minors Act. This statute allows for the transfer of property to an adult custodian on behalf of a child.
The custodian, child, and property must be in California for this statute to take effect. When the child becomes a legal adult, they can receive full title to the property.
How do I Transfer my Rental Property to Any Family Member?
You can transfer rental property to a family member the same way you would transfer property to your spouse. You go through several steps when transferring rental property to an aunt, uncle, niece, nephew, or in-law. These steps include:
- Identifying the recipient
- Complete a change of ownership form
- Hire a real estate attorney to prepare and change the title on the deed
- Have the deed notarized
You need to make sure you use the right type of deed when transferring a rental property to a family member. Each state has different deed requirements, so it is important to have a real estate attorney involved in this process.
Gifting or Transferring Rental Property from LLC to Another
As a professional real estate investor, you should already have your rental property in an LLC. Having an LLC is the first and most important step in acquiring rental properties.
A minor child cannot have an LLC, but they have other protections when they acquire property, such as trusts and guardianships.
You can gift or transfer a rental property in your LLC to another LLC owned by your adult child or family member. Some of the steps in this process include:
- Complete and record a quitclaim deed
- Notify your lender
- Make sure changes occur on the property lease and any legal documents
You need to work with your real estate attorney during this process so that the paperwork is filed properly and everything is legal.
I hope this provides you with some basic information you need on gifting, transferring, and selling rental properties. Always talk to your accountant and real estate attorney if you are thinking about going through this process.
They will have specific information about what you can do within the laws of your state and jurisdiction.
I would love to hear from you. Have you gone through the process of Selling Or Gifting A Rental Property To Your Child Or Family? Were you the donor or recipient? How was your experience? Let me know how simple or complicated this process was for you.
Thank you very much and have a great day.
hi,
if I gift my rental house to my adult child, I understand that my child my incur capital gains taxes.
Does the child incur the capital gains taxes when I make the gift, or later when she sells the property in future?
Thanks ,
Vipin
Hi Vipin,
Thank you very much for your question. I’m sorry but I am not a tax expert, so I would advise you to take proper tax advice on this matter.
However, as far as I am aware, there would be a tax liability on the difference between what you paid for the rental property plus any money you have spent on it, and the fair market value when the property is gifted.
So, if you bought it for $250,000 and spent $50,000, and the property is worth $500,000 when gifted, there would be a capital gains liability, when the property is sold by your daughter on $200,000.
A tax strategy for reducing capital gains on gifted property is for your daughter to live in the home for at least two years to establish residency. If she sells the asset after that two-year period, she’ll likely qualify for the capital gains exclusion of $250,000 for single filers and $500,000 for married couples on the sale of a primary residence.
I hope this helps, but as I say, I’m no tax expert, so please seek professional advice.
Thanks again.
All the best
Harvey
hello, I basically have the same question. I have a parent that we would like to purchase/ be gifted a home from. If they bought for $300K, put $50K into and is worth $750k now…. they would like us to purchase for the original $350 to get there money back and “gift” the difference. Would either of us pay capital gains at that moment or just in the case of us selling it in the future?
Hi Emily, thank you very much for your question.
I doubt very much you will be able to purchase it for $350k, this figure is too low, and would throw up some red flags. It needs to be purchased at a fair market value.
There are too many factors for me to give you a definitive answer on this, so I would recommend you get professional tax advice to be on the safe side. Capital gains might have to be paid by your parent if it is not their primary residence but other taxes could also come into play like gift tax, estate tax etc.
There are many things to take into account, is it your parent’s main residence, would they still live in it after you purchase, obtaining gift tax exemption, what happens if they die within three years, deliberate deprivation of assets, etc. etc. So as I say, it is best to get some professional advice.
If you are looking to release some capital from the available equity, you might consider a reverse mortgage or equity loan.
I hope this helps.
All the best
Harvey