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For this option, simply file a Gift Tax Return (Form 709) along with your Individual Tax Return (Form 1040) in the year you are making the gift. You won’t have to pay gift taxes, but the Gift Tax Return will help keep track of your gifts every year.
If your estate is greater than $13.99 million, you will end up paying gift taxes, depending on the amount of your taxable estate that’s above $13.99 million. Remember these two things about the outright gift option, though:
- There is no stepped-up basis when you gift your house.
The carryover basis applies here instead. The cost of the house when your child sells it later on will be the initial price you paid for it.
From the example in Option 1 below, this means your child’s taxable profit when they sell will be $350,000, not $50,000. If the homeowner’s exclusion covers the entire profit, then that amount won’t matter. If not, your child will most likely be paying a capital gains tax.
Carryover vs. Stepped-up Basis Example
| Option 1 | Option 2 | ||
| Purchase price | $200,000 | Purchase price | $200,000 |
| Carryover basis | $200,000 | Stepped-up basis | $500,000 |
| Selling price | $550,000 | Selling price | $550,000 |
| Profit | $350,000 | Profit | $50,000 |
| Homeowners exclusion | $250,000 | Homeowners exclusion | $250,000 |
| Taxable profit | $100,000 | Taxable profit | Covered |
| Capital Gains Tax rate (random) | 15% | Capital Gains Tax rate (random) | N/A |
- You are eating away at your Estate Tax Exemption.
The Estate Tax Exemption is a lifetime exemption amount that gets smaller every time you use it, although most people’s estates will fall under $13.99 million.
Summary: Who should gift their house outright?
Consider this route if you want your child to own your house while you’re alive and they qualify for the homeowner’s exclusion. Avoid this route if you’re worried about going over your $13.99 million lifetime exemption or your child having to pay a carried-over tax basis.
Option 4: Finance your child’s purchase of the house
Let’s take a quick detour here. Options 1, 2, and 3 are for parents who want to give their children their house outright. If you want to sell your house to your child, there are a few different routes you can take.
A solid option is to sell your house at its full fair market value. This is a great choice if your child is well-settled and wants to earn the house in an affordable way.
Instead of demanding the full price of the house at the time of sale, consider making an installment sale for the full price. It works like this: Say your home appraisal determines your house is worth $500,000. If your child can afford to pay a down payment of 10%, or $50,000, create a note for the remaining $450,000. Make sure the note is written, and that you’ve explicitly expressed the monthly payments your child has to make to you.
Gross stresses that you need to charge at least the applicable federal rate (AFR) or the market rate on the loan. Here are the annual AFRs for September 2025:
- Short-term AFR: 4.00%
- Mid-term AFR: 4.04%
- Long-term AFR: 4.83%
As long as the note is legally secured to the house, every month, when your child makes principal and interest payments on the note, they can deduct the interest payments as qualified mortgage interest. However, you will still have to pay taxes on that interest income.
You can also help your child by still making annual gifts of $19,000 maximum under the annual gift tax exclusion. But make sure that the two streams, gifts and notes, are separate. If you forgive a note payment in lieu of a gift, the IRS might think the entire sale is a discount sale.
With this option, your child’s basis in the house becomes the full purchase price, which likely avoids any future capital gains taxes when they sell the house.
Summary: Who should finance their child’s purchase of the house?
Consider this route if you want your child to earn your house at an affordable rate. Avoid this route if you don’t think your child can make payments at the applicable federal rate.
