Copied and Pasted by Rie UmanoBEFORE THE DAYS of estate taxes, children simply moved into the family home and took over the master bedroom after their parents died. Unfortunately, it's not that easy anymore.
There are nearly half a dozen ways to give a home to your child. And a couple are tax-free. But in order for the transaction to work properly, you've got to plan ahead. Here is a rundown of your options.
Stay PutIf you plan to live in your home until you die, and your estate is below the $3.5 million estate-tax exemption, this is your best strategy. When you die, your home's tax basis will be stepped up to fair market value. Thus you and your heirs will escape capital gains tax on your home's appreciation. And, because the value of your estate is below the estate tax exemption, your heirs will owe no federal estate tax. They are free to move into the house, or sell it and keep the cash tax-free. If they do move into the house, their tax basis for calculating the gain or loss on subsequent sales will be the home's fair market value at the time of your death.
This is a much better strategy than gifting your house to heirs while you continue living there. Why? Even if you pay a market-rate rent to your child, the IRS might argue the home's full date-of-death value still belongs in your taxable estate. The only sure way around this problem is with a qualified personal residence trust, which is explained later in this story.
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