Moving into Your Kids
Moving into your Kid’s “New” Second Home
You must pay rent to avoid the home remaining part of your taxable estate.
Using a QPRT or simply willing the home to your child are both better options.
Did you know?
A QPRT allows you to remain in the home for a specified period of time after gifting the property to your children.
What happens if you sell, or gift, your second to home to your kids but then take up occupancy in your kid’s “new” house while paying them rent? The benefit is having the second home in the kid’s name keeps the property’s future appreciation off your taxable estate, and if you sell the second home your gain is likely sheltered from tax through the $250,000 for singles, and $500,000 for couples primary home sale exclusion.
Two things are vital in this type of transaction – if the second home is sold it must be at fair market value and the rent you pay your kids must also be at market level. If you continue to live in your previous second home without paying rent, or paying a nominal amount the IRS will argue you never relinquished “possession and enjoyment” of your real estate and the full value of the home will become a part of your taxable estate.
Renting a home you previously owned from your kids may seem like a win-win for everyone, but the entire deal is a type that really gets on the IRS radar screen. If the second home is sold to your kids you might be able to keep the home off of your taxable estate. If the home is gifted, even if you diligently pay a monthly fair market rental, the IRS will likely declare the home belongs as part of your taxable estate.
Two better options include a qualified personal residence trust, and simply doing nothing and will the second home to your kids as part of your estate. A QPRT legally takes the second home off your taxable estate and provides a provision for you to remain in the home for a designated period of time. Simply keeping the second home in your name and willing it to your kids will remain estate tax free as long as your estate is valued below the estate tax exemption.