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By: FEDweek StaffMany people buy a second property in retirement, often for family gatherings or simply as another place to go. Trouble can arise, though, when it’s time for such a home to pass to the next generation.
Suppose Paul and Barbara have a beach house. At their death, they want to leave the home, or its value, equally to their three children. However, one child loves using the beach house, one has moved across the country, and the third prefers to cash in this valuable property. The result can be a serious disagreement among the siblings.
Some possible steps can avert such an outcome:
* Sell the house. Paul and Barbara can sell the house as family use dwindles. Or, Barbara can sell after Paul’s death. The cash can be divided among the children.
* Leave the house to the estate. If Barbara is a widow who is the sole owner of the vacation home, she can leave the house to her estate and instruct her executor to sell. Again, the children can receive cash from the sale.
* Adopt a sophisticated plan. If you really want a vacation home to stay in the family, transfer ownership to a trust or to a limited liability company, while you’re alive or at your death. Arrange for the trust or LLC to have funds to help pay ongoing expenses. The arrangement might include some procedure for buying out family members who no longer want to use the house or pay any of the related costs.
* Gifting. The process of transferring ownership of a home through gifting involves many steps such as the following.
Consult with a real estate attorney so you understand the legal and tax implications of the transfer – in particular gift and estate taxes, which the IRS considered “unified”.
Obtain a property appraisal to get the fair market value of the property for gift tax purposes and otherwise.
File a quitclaim deed in the county or city where the property is located, which transfers ownership of the property from the giver to the recipient.
File a gift tax return: If the value of the home exceeds the yearly gift tax exclusion ($17,000 in 2023), a gift tax return must be filed with the IRS.
Again, consider using a trust: Creating a trust can allow the recipient to receive shares of the property over a period of time and offers other creative ways to avoid potential problems for your heirs.
Gifting a property to more than one child can be more complicated and you’d need to decide on the type of ownership – such as tenancy in common, which would allow each owner to hold an undivided interest.
After the process is complete get an appraisal of the gifted property and document the transfer of ownership.
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