Gifting encumbered home to child?

Very BAD idea, for a number of reasons.

1. You must file a gift tax return since the gift of equity is more than $13,000. You won't owe any tax but it will reduce your estate tax exclusion when you pass.

2. Your bank may well not approve the loan assumption.

3. Your child's basis in the home will be a huge mess. Part of it will be your original basis and part of it will be the remaining $100k on the loan principal.

4. Should you become a public burden within 5 years of the gift, the state can seize the house and force the proceeds to be used for your care until it's exhausted. Your child would be left holding the bag.

5. COD income only kicks in if the home is foreclosed upon. It does not apply here, at least right now. There is no COD as long as the loan is paid in full.

Better idea:

Rent it out to your child for the mortgage payments. If they are less than fair market value you won't be able to show any tax loss in excess of the rent received but that's not your goal anyway. Then leave the home to your child in your will. When you pass, your child gets the stepped-up basis on the date of your death and a much more palatable gain (i.e. none if they sell right away) and much less tax headache.

No where in your post did you state what the FMV of the property is.

Nor do you state if your child is paying you anything for the property and if they are buying part of it, how they are financing it. (The bank won't just let them take over the loan unless it's assumable.)

If the bank becomes involved, a 1099-S will be issued. If this is currently your home and you've never used it for business or rental purposes, you probably won't have a gain.

I don't see why you brought up cancelled debt.

if you think you can get rid of the mortgage by simply giving the house to the kid, the people that hold the mortgage may have other thoughts

if the kid doesn't qualify for the mortgage, forget it

If you relinquish title to home, mortgage comes due in full. 99.9% of US mortgages are non assumable, so it won't "work with the bank". They just don't do that. She must get her own mortgage, as your must be satisfied when you relinquish title.

Better idea: Consult with an estate planner before you do ANYTHING! Lots of potential pitfalls with this plan, none of which will have positive tax consequences for either of you.