Don’t Give Your House to Your Children (While You’re Alive)

Many of us would like our children to inherit our home once we are gone. More than a few of us think it makes sense to give our home to our children while we are still living. That is not a good idea! Here’s why.

Loss of Step-Up in Basis

Gifting your home to someone during your lifetime means that they receive the home at a value equal to your adjusted cost basis (purchase price plus value of capital improvements). If they then sell the home, presumably after you are gone, the capital gains tax will be significant, as it will be based on the difference between the selling price and your adjusted cost basis. On the other hand, inherited assets receive a “step-up” in basis, meaning the value of the house upon your death would be its current fair market value. If your kids sell the house immediately thereafter at the home’s inherited value, there will be no capital gains tax at all. That works great as long as your total estate is less than New York State’s estate tax threshold of $6.94 million in 2024.

No Right of Occupancy

Once you give your home to your children, it is no longer yours. You might live there at their discretion, which may not provide you with much comfort in or any guaranty of having a roof over your head. Should your children sell the home or lose it in a divorce or foreclosure, your (former) home’s equity would be in peril. In such event, you are at the mercy of your children or to any third party who might seek to separate your children from the equity in “their” home. Renting the home from your children pursuant to a valid lease under which you pay fair market value rent gives you some protection, but your children would have to claim the rent they receive as taxable income.

Loss of Capital Gains Exclusion

Each homeowner is entitled to a $250,000 ($500,000 per married couple) capital gains exclusion when they sell their primary residence. This exemption is lost to you once you gift your home.

Loss of Real Estate Tax Exemptions

If the homeowner or spouse is a senior and/or veteran, you may be giving up real estate tax exemptions you are currently receiving. That means real estate taxes will rise once the transfer occurs.

Inability to Tap Home’s Equity

Again, once you give your home away, you have no right to tap into its value via a home equity loan or other type of mortgage if you need funds for your future needs.

Conclusion

Think twice about giving your home away to loved ones while you are still alive. If you are concerned about Medicaid or protecting the home from claims of creditors, there may be other options available to you. We would be happy to share some ideas with you.