How Mom and Dad Can Gift a Piece of the House / Gifts of home equity are one way parents can provide financial assistance while keeping a high-price home within the family.

• ANYA MARTIN for the Wall St Journal writes:   
One way to keep adult children closer to home: gift them a piece of the house.

Most of the time, down-payment assistance from parents comes in the form of cash. But gifts of home equity are another option to provide financial assistance while keeping a high-priced home within the family.

Gifting equity in the family home "can be a nice way for a parent to help a child afford something larger in a better neighborhood," said Katherine Dean, head of wealth planning for Wells Fargo Private Bank, which has seen a recent rise in higher-net-worth clients gifting equity.

Typically, downsizing parents gift a percentage of their home's equity to their child, who then uses a mortgage, cash or other resources to cover the rest of the purchase price, explained Edward J. Achtner, regional sales executive and senior vice president in Northern California and Oregon for Bank of America.

In another scenario, the parents can gift a portion of their home's equity to a child while remaining in the house.

For tax purposes, the Internal Revenue Service considers a gift of equity the same as a cash gift, subject to maximum allowable annual tax-exemption limits. That amounts to $14,000 a person in 2013, but each parent can give $14,000 to both a husband and wife, for a nontaxable sum of $56,000. These annual gifts are not counted toward the parents' lifetime federal estate-tax exemption, which in 2013 is $5.25 million per person, or $10.5 million for a couple.

Parents who want to give more than the $56,000 allowed under the annual gift-tax exemption may prefer to claim the gift under the lifetime estate-tax exemption instead. When filing taxes, they must report the amount above the limit, but no taxes will be due as long as the amount does not exceed the lifetime estate-tax exemption.

Parents can gift any amount of equity up to the residence's full value, and with home values in some areas still below peak, now could be a good time to maximize real-estate gifts, said Adam von Politz, head of estate planning for Citi Private Bank, North America. For example, a $5.25 million piece of property gifted today as part of the estate-tax exemption won't be subject to any federal gift tax. But a parent who waits five years to gift a home, which has grown in value to $7 million, will have to pay federal gift tax on the amount above whatever tax limits are in effect at that date.

"You will have lost the opportunity to have passed the post-gift appreciation free of gift tax," Mr. von Politz said. Parents also should consider whether that home, versus a stock portfolio or another asset, is likely to accrue more value and gift the asset that has the greatest appreciation potential, he said.

Equity-gift transactions have their own complications. Parents need to prove to the IRS that they are selling the home to a child at its fair-market value, and any difference between the fair-market price and the sales price also will be considered by the IRS as a gift, said Amir Mossanen, a Beverly Hills, Calif.-based wealth adviser for Wells Fargo Private Bank.

In cases where parents retain part-ownership, that often means two appraisals, one for the full home and one to determine the value of the gifted portion for the exemption, he added.

A second "minority" appraisal may cost more than a whole-house appraisal because of the complexities involved, Mr. Mossanen said. Also, the value of the share typically isn't a straight-out percentage of the total value. In other words, the appraiser will value 40% of a $10 million home as worth less than $4 million, he added.

"Unless you have a controlling interest in an asset, a portion is worth a lot less," Mr. Mossanen said. The reason is a minority holder typically can't make the decision to sell the asset, he added.

Of course, annual and lifetime gift limits can be changed by Congress. Other factors to consider:

• No existing mortgage. The entire mortgage on the parents' home must be paid off before a gift of equity can be made against the property.

• Capital-gains taxes. A luxury-home sale may trigger capital-gains taxes if the sales price is more than $500,000 greater than the parents paid to purchase it. If the child inherits the house and sells it the next day, the cost basis will be set at current market value.

• Possible higher property taxes. In California, for example, if a home is sold, property taxes can be reassessed to the home's current fair-market value. But the state has a parent-child exemption for reassessment if the property is inherited.