8 Ways Tax Pros Say You Can Sell Your House to Your Child

Disclaimer: Information in this blog post is meant to be used for educational purposes only and does not constitute legal, financial, or tax advice. HomeLight always encourages you to consult your own tax advisor.

Want to sell your house to your child in exchange for a hug and a smile? If you aren’t careful, you may raise a few eyebrows at the IRS. As much as you may want to hand over the keys and keep financials within your family, you’ll need to treat the transfer as a smart business deal or risk increasing your tax liability.

If you want to sell or give your house to your child, you have options:

Let your child inherit the house
Conduct a deed transfer upon death
Gift the house outright
Finance your child’s purchase of the house
Sell the house to your child at a discount
Sell the house to your child but continue to live there
Let your child assume the mortgage
Use a personal trust

With the help of accounting expert Christopher Skinner, Attorney at Law, CPA, and A.J. Gross, CPA, E.A, we examine each option and its tax implications. We’ve highlighted some of the best ways to transfer your family house from one generation to another, with the focus being to pay as little tax as possible. So, keep reading for the most tax-friendly ways to sell your house to your child.

Option 1: Let your child inherit the house

If you live in your house until your final moments, your surviving relatives can inherit your estate, including everything you own minus your debts. This means that when you pass away, you can pass your house on to your child by including it in a valid will.

However, when you transfer property after death, the government typically levies an estate tax, and often your child will only receive the house after the government pulls those taxes out of your estate. Fortunately, there is an exemption called the Unified Federal Gift and Estate Tax Exemption, which, in 2024, gives each person a $13.61 million exemption to exclude from their taxable estate.

The recipient is only taxed on what remains after the exemption. So, if your estate is worth less than $13.61 million, you can pass on your house to your child, tax-free, as part of your estate plan.

On top of that, your child can potentially avoid capital gains taxes when they decide to sell the inherited house down the line.

Although capital gains taxes apply to most capital investment, including houses, most people qualify for the primary residence exclusion. This rule allows a single filer to be exempt up to $250,000, and married couples to exclude up to $500,000 on returns from their main home. The capital gains tax is calculated based on the original cost of the house and the fair market value of the house at the date of the sale.

What’s more, if your child inherits your house, the stepped-up basis rule comes into effect. So, when you pass away, the cost of your house is “stepped up” to the market value of your house on the date of your death.

For Example:

If you bought your house for $200,000, its cost basis will be $200,000 for the entire time you live in it. But, on the day you die, if your house appreciated to $500,000, its basis is “stepped up” to $500,000 and is no longer $200,000. So, if your child decides to later sell the house for $550,000, the taxed profit on the sale is only $50,000 ($550,000-$500,000), not $350,000 ($550,000-$200,000).

Your child takes home $550,000 in either scenario. But in the eyes of the government, they can use the stepped-up basis to pay on a profit of only $50,000 vs. a profit of $350,000. This can dramatically reduce the amount of capital gains your child has to pay.

Even better, if your child sells the house after living in it for 2 years, they will likely be able to qualify for the homeowner’s capital gains exclusion, which might eliminate taxes owed as a whole.

Skinner explains that there’s little downside financially when you’re choosing this option. “I can’t think of why, under most scenarios, you wouldn’t want your child to inherit the house because they’re going to get the step up in basis,” he says.

Summary: Who should let their child inherit their house?

Consider this route to avoid estate tax on properties under the $13.61 million exemption and leave your child with a lower capital gains tax bill. Avoid this route if you want to sell or give your house to your child before you die.