Transferring property to your kids through a deed can have significant tax implications for your estate and your children. For example, gift taxes may apply if the transferred property’s value exceeds a certain threshold, and your children may be subject to capital gains taxes when they sell the property.
Here are some potential tax implications to consider when transferring property to your kids through a deed:
The tax on the value of your estate when you die is called estate tax. It applies to all your assets, including any property you have transferred to your children. Although Pennsylvania does not levy the estate tax, you may still need to pay the federal estate tax. As of 2023, the exemption is $12.06 million per person. If the value of your estate exceeds this amount, your estate may be subject to estate tax at a rate of up to 40%.
In addition to federal taxes, transferring property to your children through a deed can trigger state taxes, such as state gift or inheritance tax. The rules and rates for these taxes vary by state, so it’s important to consult with a local tax professional to understand your specific obligations.
- Property taxes: Property taxes are assessed locally and may vary by county. You may need to consult with your local county assessor’s office to understand the impact of your transfer on your property taxes.
- Gift taxes: The gift tax applies to any property transfer for which you do not receive fair market value in return, including transfers to your children.
Pennsylvania does not have a gift tax, but the federal government’s annual gift tax exclusion is $16,000 per recipient. You can gift your children up to $16,000 worth of property each year without triggering gift tax. However, if the property value you transfer exceeds the annual exclusion, you may be subject to the gift tax. The gift tax rate ranges from 18% to 40%, depending on the value of the gift.
Capital gains taxes
When your children sell the property you transfer to them through a deed, they may be subject to capital gains taxes on any property value appreciation. Capital gains refer to the tax on the profit from the sale of an asset, and it applies to any property sold for more than its original purchase price. It may vary depending on your child’s income and the length of time they held the property, but it can be as high as 20%.
To minimize capital gains taxes, when you die, your children may be eligible for a basis step-up, which adjusts the basis of the property to its FMV at the time of your death. This can reduce the amount of capital gains taxes your children have to pay when they sell the property.
While it is a generous and caring gesture to pass on your property to your kids, potential legal and financial issues can hinder a smooth transfer process. You must understand the relevant tax laws and regulations to help you achieve your goals while minimizing taxes.