How to Gift Real Estate to Your Children

By Lane V. Erickson, Idaho Estate Planning Attorney

Perhaps you’re like many clients of mine where you’ve worked all your life and accumulated a number of assets. Maybe some of those assets include real estate. Regardless of whether it is farm ground, commercial property, residential property that you rent out, a home or any other type of real estate, if you own it and you want to give it to your children, there are a number of ways you can do it. It’s important to understand what each of the options are because each has both positive and negative aspects to consider.

The purpose of this article is to talk about the different ways you can gift real estate to your children. By describing each of these options and explaining how they are done and the implications that are involved, you will have all the information you need to understand what the best way is for you to transfer real estate to your own children.

Keep in mind that no single article can provide all the information you might need to consider in order to make an important decision like transferring real estate to your children. Because of this, we offer a free 30-minute consultation where we can answer your specific questions and help you understand all the implications about the options you can choose from.

Additionally, because we’re mainly talking about transferring assets, we also provide an Estate Planning Questionnaire that will help you when it comes to creating an estate plan to protect you while you are alive and allow you to transfer or gift away your assets in the way you feel is best. The Questionnaire is simple to understand and is organized in a way making it easy for you to gather your information. It also provides explanations about the different parts of estate planning you should consider. We then discuss all the information provided in the Questionnaire during the free 30-minute consultation.

The first way you can transfer real estate to your children is to do it while you are alive. This is simple. You prepare a gift deed or transfer deed that identifies yourself as the owner, describes the property by a legal description, and then identifies your children as the recipients or Grantees of that property. That deed is then recorded and once that is done the transfer of title to that real estate is complete and your children are the owners.

The positive aspects of transferring real estate in this way is that you get to enjoy seeing your children receive the property while you are alive. You will also be able to see what your children do with the property as they move forward with their ownership of it. Additionally, because owning real estate is a triggering event requiring probate to be done when a person passes away, if they have gifted away all the real estate they own, then it’s possible that their family may be able to avoid probate after they pass away.

The negative aspects of transferring real estate in this way really focusses on taxes. And mainly, we’re talking about capital gains taxes. When you purchase the real estate, you paid a certain price for it. This is known as the cost basis of that real estate. If you transfer real estate to your children while you are alive, they essentially take over your cost basis.

What this really means is if you have owned that real estate for a long time, it’s probably far more valuable today than it was when you bought it many years ago. If you gift it to your children while you are alive and they receive your cost basis, and then they turn around and sell the property, the difference between the cost basis, what you paid for it, and what they sell it for, will be subject to a capital gains tax that will have to be paid by your children.

You also have the option of transferring the real estate into a trust. This removes your personal ownership of that real estate. This is one of the methods people use when they do want to avoid probate. Probate is avoided because you no longer personally own that real estate.

Additionally, by placing real estate into a trust, you have the ability to continue to control how it is used, and when it is actually transferred to your children. You can set parameters or guidelines, or specific conditions that have to be met before the transfer from the trust to your children will occur.

Some people use this option when they are transferring real estate such as a family cabin. This is because this option gives all the family members the ability to continue to use the cabin, without necessarily jeopardizing the ownership of the cabin. What I mean is if you gift the cabin outrightly to all your children, if any of your children have creditors they will have the ability to take away that child’s ownership interest in the cabin. However, if the cabin is in a trust, it is protected and can’t be taken away.

The final option you have in transferring real estate to your children is doing it as an inheritance. This again can be done either through a trust or through your last will and testament. By transferring real estate in this way and allowing your children to receive it as an inheritance, the capital gains tax issue is eliminated. Your children will inherit the property, and they are entitled to receive what is known as a step-up in basis in value of the real estate. In other words, their cost basis becomes the actual value of the property on the day they inherit it. If your children immediately sell the property, there is no capital gains tax that applies because the step-up cost basis is the same and the price they sold it for.

The downside to this option is that this requires you to keep the real estate as part of your own estate. When you pass away and you have your name on the deed or title to do any real estate then a probate is required. The good news is that in Idaho, probate is really not that big a deal. Idaho is one of the least expensive states to do a probate in, and the probate process in Idaho is simple and can be taken care of fairly quickly.

If you have questions about how to give your real estate to your children, we can help. We have assisted numerous clients in creating their own customized estate plans, which often include gifting or transferring real estate to their children. We are confident that we can help you too. Please call us today for a free 30-minute consultation where we can answer your questions and help you come up with a plan that works for you and your family.

Our team of Idaho lawyers can help you with any of your estate planning or probate needs. Whether you are seeking to create or review an estate plan for yourself or would like to help a loved one, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho estate planning problems.