With today’s high home prices and the unpredictable real estate market, it’s no wonder that your adult children might struggle to buy their first home. At the same time, you may be ready to move on from your current home or simply want to help your kids get a head start in life.

If that sounds familiar, here are three tax-smart strategies to consider before making any decisions.

Option 1: Make an Outright Gift

Feeling generous? You can simply give your home to your child. It’s a big deal for them but what about the tax implications?

• The gift reduces your $12.06 million unified federal gift and estate tax exemption (for 2022). 
• Subtract the annual federal gift tax exclusion ($16,000 per recipient in 2022) from the home’s fair market value. The remainder counts against your lifetime exemption. 
• If you’re married, your spouse has a separate exemption, and a joint gift reduces both exemptions. 
• If your child is married, you can use a separate annual exclusion for the child’s spouse. 

Why it works: Giving the home away now removes it from your estate, which can help avoid estate taxes, especially if the property is likely to appreciate over time.

Option 2: Arrange a Bargain Sale

Not ready to give the home away for free? Consider a bargain sale selling the home to your child for less than its fair market value.

• For federal gift tax purposes, the difference between fair market value and the sale price counts as a gift. 
• Tax-wise, this can be advantageous, giving your child a discounted purchase while still transferring some equity. 

Important warning: Avoid a bargain sale (or outright gift) if you plan to continue living in the home. The IRS could include the full value of the home in your estate, even if you pay rent to your child.

Option 3: Full-Price Sale with Seller Financing

If you prefer a more structured approach, you can sell the home at fair market value while providing financing to your child.

• Use the IRS’s applicable federal rate (AFR) as the interest rate for the loan usually far below commercial mortgage rates. 
• Example: In April 2022, a long-term AFR for a 30-year loan was just 2.25%, compared to a typical 30-year mortgage at 6.1%. For a 9-year note, the mid-term AFR was 1.87% versus commercial rates around 5.6%. 

This approach lets your child buy the home without huge upfront costs while earning interest income for you, making it a win-win for both parties.

Helping your children get into a home is a meaningful gift but it’s important to consider tax implications and long-term strategy. Whether you choose an outright gift, a bargain sale, or seller-financed sale, proper planning ensures you maximize benefits for both you and your kids.

For guidance on which strategy fits your situation best, consult a tax professional or reach out to Basc Expertise to make sure your plan is both smart and compliant.