Making a home into a gift involves a gift deed. The gift deed legally transfers the title of the property from you, the grantor or donor, to another person or entity. This type of conveyance may be used to convey property as a gift from one family member to another, or to donate property to a nonprofit.
A mere promise to convey the property at some point in the future does not constitute a legally sound gift. A properly drafted deed makes a gift outright—a conveyance for no consideration. In other words, the giver makes the gift unequivocally, with no compensation expected, and no strings attached.
The Components of a Gift Deed
Your effective gift deed must have several traits and components:
- It is created to make an immediate transfer of the owner’s interest in the property, and an actual delivery of the property.
- By the deed’s explicit declaration, no consideration is necessary or expected.
- The deed is signed by the grantor (giver).
- The grantor’s full name and marital status appear on the deed.
- The recipient’s full name, marital status, and actual street address appear on the deed.
- Vesting language, as indicated by state law, describes how your recipient holds title. For example, the main ways of holding residential property in your state may be tenancy by entirety, tenancy in common, or joint tenancy.
- A full and accurate legal description of the property appears.
- Restrictions applicable to the use of the property appear.
A deed that does not meet the legal criteria is revocable. In contrast, a properly created gift is irrevocable after acceptance. (An intended recipient can refuse to accept a deed.) Once your gift is lawfully delivered and accepted, it may not be contested by your family members.
To be sure your deed measures up to the statutory requirements in your state, view available deed forms, including gift deed forms, on Deeds.com.
Giving Your Home to Someone: Financial Planning Ramifications
A number of tax considerations apply to gifts of real property:
- You must pay the gift tax to the Internal Revenue Service. You must also pay any applicable state gift tax. The federal gift tax applies to real estate conveyances between individuals for no consideration, or token consideration.
- Unless the gift goes to your spouse, the transfer of a home property incurs gift and inheritance taxes payable to the Internal Revenue Service by filing Form 709. As the IRS explains, if the recipient ever decides to sell the gift, the recipient’s cost basis will be the same as the cost basis you originally paid for the house. Therefore, if you give a house to a child, that child will one day pay taxes on the (typically steep) capital gains—reflecting taxes due for appreciation of the property value. This means your child will not later qualify to claim the stepped-up cost basis that beneficiaries of wills enjoy to offset capital gains.
- The recipient of your gift need not declare it as income.
- If the property earns income after the conveyance, the recipient will owe state and federal income taxes.
If you own your home as part of a joint tenancy, a tenancy by the entirety, or as community property with the right of survivorship, the gift must be authorized by all grantors’ signatures. Spouses must release marital rights with their signatures—even spouses with no interest in the property described in your gift deed.
Alternatives to Conveying Property by a Gift Deed
There are several benefits to selecting popular alternatives to the gift deed. Here are some prominent categories. (You can find more examples and descriptions here.)
The Revocable Trust
This is a living trust—a document setting forth how your property will be managed—which you can dissolve or amend as you see fit. Such trusts serve to keep assets from going through probate, where they can be contested. Note that your home will continue to be part of your taxable estate.
When you die or become unable to control the trust, a successor trustee steps into your place. You may name a corporate, unbiased trustee.
An advantage to conveying your home at death through a revocable trust, rather than making a gift of the home within your lifetime, is the stepped-up tax basis. This can spare the recipient significant capital gains taxes.
The Irrevocable Trust
With an irrevocable trust, you direct a trustee to manage the trust for a certain outcome. Then, assets, income, and tax returns are shifted to a trustee’s management and control.
Trust assets will pass to your chosen beneficiary upon your death.
The advantage? An irrevocable trust bypasses probate and estate tax. The drawback? This type of trust creates restrictions on selling, refinancing, and having access to the equity of your home while you are alive.
The Transfer on Death Deed
Some states now allow transfer on death deeds for real estate, to convey home ownership after your death. If your state allows it, you may fill out an Affidavit of Death form, sign it with a notary, and thereby convey your home to the beneficiary of your choice.
A transfer on death contains no warranty to protect recipients from claims after they receive the property. Should you have any loans or agreements on the property, these obligations will pass, after your death, to the recipient.
Finishing Up the Gift: Recording the Deed
Record your gift deed in the county where the property is located. The recorder’s office can tell you which materials to append to your filing, the amount of the fee, and accepted payment types. Some states (North Carolina, for example) require the recording of a gift deed within two years, or the gift is void.
Please note that this article is intended as general information for our readers. It is not a substitute for an attorney’s case-specific advice. Contact a lawyer if you have case-specific questions about gift deeds. Should you have questions concerning state or federal tax law, consult your tax specialist.