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Giving your Second Home to your Children

Use your gift tax exclusion to lower the taxable value of your second home gift.

Gifting a second home will cut into your estate-tax exemption.

Consider consulting with a tax attorney or accountant.

Did you know?

Second Homes are frequently passed from generation to generation.

You don’t want to sell your second home and you don’t want to go through the paperwork in setting up a qualified personal residence trust. You just want to give your second home to your adult child and spouse. How do you go about it in a method that’s easiest and best for all?

The first step is to reduce the value of the second home gift by using the annual $11,000 gift-tax exclusion. This exclusion is good for up to $11,000 gifted from one individual to another individual. For this example you would gift both your child and spouse the full amount and your spouse would do the same. Using the gift-tax exclusion immediately consumes $44,000 of the second home’s value.

Once the gift-tax exclusion has been taken, the remainder of the second home’s value will come out of your gift limit of $1 million. As long as that figure remains under $1 million when combined with any other gifts made in the year you won’t owe any gift tax on the second home given to your spouse’s family.

One problem is this gift cuts into your estate-tax exemption, but at the same time any future appreciation in the second home is no longer part of your estate. And because the estate tax exemption is scheduled for fairly regular increases, your estate tax exemption will be somewhat restored.

The other drawback is the gifted second home’s tax basis for your spouse’s family will be the amount you paid for the home with any major improvements added. This tax basis could potentially really bite the kids if they decide to sell the second home sometime later. You may wish to consult a tax attorney or accountant before taking steps to “gift” the home.