How to Strategically Gift Rental Property to Your Child

Are you considering gifting a rental property to your child? Transferring ownership of real estate can be a powerful way to pass on wealth, reduce the size of your taxable estate, and provide a steady stream of income for your children.

However, there are several important factors to consider to ensure the process goes smoothly and aligns with your long-term goals.

Tax Implications of Gifting Real Estate

One of the primary reasons to gift rental property is to minimize estate taxes. Under current federal law, you can give up to $18,000 per year to each recipient without incurring gift taxes. This is known as the annual gift tax exclusion. If you’re married, you and your spouse can each give $18,000, for a total of $36,000 per recipient per year.

In addition to the annual exclusion, you also have a lifetime gift and estate tax exemption. As of 2024, this exemption is $13.61 million per individual. This means that if the total value of your gifts and estate is less than this amount, you won’t owe any federal estate taxes. However, this exemption is scheduled to go down to $5 million at the end of 2025.

When you gift property, the recipient takes on your tax basis in the property. This is important because if they later sell the property, they may owe capital gains taxes on the difference between the sale price and your original basis. This is not the case when you leave real estate to your child when you die, so that may be a better option from a tax perspective.

When you work with Hammond Law Group, you can trust that our experienced estate planning attorneys will guide you through the tax implications of gifting rental property, ensuring your unique situation is fully understood and accounted for.

Choose the Right Rental Property to Gift

Not all rental properties are equally well-suited for gifting. Here are some factors to consider when selecting a property:

• Location: Is the property in an area with strong rental demand and potential for appreciation?
• Condition: Is the property well-maintained and likely to have manageable repair and maintenance costs?
• Income potential: Does the property generate steady, positive cash flow?

One advantage of gifting a rental property is that you can transfer a fully depreciated asset without triggering depreciation recapture. On the other hand, gifting a property with a mortgage can be more complicated, as the recipient may need to qualify to assume the loan.

Have the Property Professionally Appraised

To accurately report the value of your gift, it’s essential to obtain a professional appraisal from a certified real estate appraiser. The appraiser will determine the fair market value of the property, which is the price a willing buyer and seller would agree to on the open market.

You’ll use this appraised value to fill out IRS Form 709, the gift tax return, if your gift exceeds the annual exclusion amount. Be sure to keep copies of the appraisal and gift tax return with your important estate planning documents.

Consider Gifting Fractional Interests Over Time

One strategy to maximize the tax benefits of gifting is to transfer ownership gradually using fractional interests. Instead of gifting the entire property at once, you can give a percentage of the property each year.

For example, you could gift a 10% interest in the property annually over several years. This allows you to take advantage of the annual gift tax exclusion and potentially qualify for valuation discounts. When a partial interest in a property is gifted, it may be eligible for discounts due to lack of marketability and control.

Fractional gifting also allows you to maintain some control over the property and spread the gift tax savings over time. Our estate planning attorneys at Hammond Law Group can help you structure a fractional gifting plan that meets your needs.

Set Up a Trust to Facilitate the Transfer

Using a trust to gift rental property can provide several benefits, including maintaining control over the asset, preserving privacy, and avoiding probate. Some common types of trusts used for real estate transfers include:

• Qualified Personal Residence Trust (QPRT): Allows you to transfer a personal residence or vacation home to your beneficiaries at a reduced gift tax cost.
• Irrevocable Trust: Removes the property from your taxable estate and provides asset protection.
• Limited Liability Company (LLC): Offers liability protection and flexible management options.

An experienced estate planning attorney can help you determine the best trust structure for your situation and goals. At Hammond Law Group, we have extensive experience creating trusts tailored to our clients’ unique needs.

Prepare Your Child to Manage the Rental Property

Owning and managing a rental property comes with significant responsibilities. Before gifting the property, it’s wise to train your child on the various aspects of being a landlord, such as:

• Tenant screening and selection
• Lease agreements and landlord-tenant laws
• Property maintenance and repairs
• Bookkeeping and recordkeeping
• Tax filing requirements

You may also consider hiring a property management company to handle the day-to-day operations of the rental. This can be especially helpful if your child lives far from the property or has limited experience with real estate management.

Document and Report the Gift Properly

To legally transfer ownership of the rental property, you’ll need to execute a new deed naming your child as the owner. In Colorado, a quit claim deed is commonly used for gifts between family members. This type of deed transfers your interest in the property to the recipient without making any warranties about the title.

If the value of your gift exceeds the annual exclusion, you’ll need to file IRS Form 709 to report the gift. This form is due by April 15th of the year following the gift. Be sure to keep thorough records of the gift, including the appraisal, deed, and any related expenses.

Let Us Guide You Through Gifting Rental Property

At Hammond Law Group, we know that gifting real estate to your children is about more than just transferring assets – it’s about securing your legacy and setting your family up for long-term success and harmony. But let’s face it, the process can be confusing, with potential pitfalls around every corner.

That’s where our experienced estate planning attorneys come in. We’ve been helping Colorado families since 2005, and we know how to chart a course that minimizes taxes, protects your interests, and keeps your family on an even keel.

Whether you’re considering an outright gift, fractional interests, or a trust, we’ll work hand-in-hand with you to craft a customized plan that aligns with your unique goals and values. So if you’re ready to take the helm and steer your family towards a brighter future, contact us today.