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The Tax Can of Worms-And Other Consequences-In Deeding Your Home Over Now

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Jonathan J. David
go60.us Legal Ease Column
May 2012

Dear Jonathan:

I am a widow with a pretty modest estate; I just have my home and a few small bank and investment accounts. A friend of mine is bugging me to prepare a will and a trust for probate avoidance, but I am not so sure that is necessary. I only have one child and she is already listed on all of my bank and investments accounts; why can't I just deed my home over to her now? She lives with me and I am not worried about her kicking me out, so it seems to me that if I just gave her the house now, it would make everything easier without having to spend a lot of money on legal fees. Your thoughts?

Jonathan Says:

Retitling the home in your daughter's name now might seem the easiest and least costly thing to do, but you are potentially opening up a can of worms for both of you. The following is a partial list of the potential problems which can arise when a parent deeds their home to the child while the parent is still alive:

  • By putting your home in your daughter's name now, you are in effect making a taxable gift to her. The value of the home in excess of $13,000 will be deemed to be a taxable gift made by you to your daughter. This is because an individual can gift up to $13,000 per year, per individual, gift tax free, but any amount over and above the $13,000 limit is taxable. Since you have a lifetime gift tax exclusion currently in the amount of $5,000,000, you won't have any gift tax to pay, however, you will still have to file a gift tax return reporting the gift to the IRS.
  • By gifting the home to your daughter while you are alive, you are also transferring your tax basis in the home to your daughter. If your tax basis in the home is $50,000 for example, upon making the gift to your daughter, her tax basis in the home will also be $50,000. This means that if she ends up selling the home within two years of receiving it from you, she will need to report capital gains on the amount the home sells for in excess of $50,000. For example, if the home sells for $150,000, after subtracting the tax basis of $50,000, she will have a reportable gain of $100,000 which she will have to pay taxes on. This problem can be alleviated if she were to live in the house for at least two years before selling it, in which event she will be entitled to exclude up to $250,000 of the capital gains incurred on the sale of the property.

On the other hand, if your daughter receives the home after your death, as the beneficiary under your will or your trust, she will instead receive a stepped up basis in the home, which means that her tax basis will be whatever the fair market value is of the home at the time of your death. For example, if the home at the time of your death is worth $150,000, your daughter's tax basis in the home will be $150,000 and if she turns around and sells the home for that same amount, she will have no capital gains tax to pay and she will not have to wait for two years to sell the home.

  • Once you deed the home to your daughter, she will have total control over the property and you will technically have no say in any decisions regarding the home. As such, even though you don't think she would ever do this, she would have the right to evict you or sell the home while you are still alive.
  • Creditors of your daughter could enforce a judgment lien against your home to satisfy her debts.
  • You didn't indicate whether your daughter is married, but if she is and she ends up getting divorced, the home could get tied up in the divorce proceeding.
  • Giving the home to your daughter could impact your Medicaid eligibility.

For the reasons stated above, it makes much more sense for you to set up a will and a trust even if you have to spend a little money to do it. By having your daughter receive your home as the beneficiary of your estate or trust, she receives all the benefits of being a beneficiary of the home upon your passing without any of the problems mentioned above. Further, you would protect yourself because you would have total control of the home while you are alive and not be dependent upon the goodwill of your daughter.

I recommend that you at least meet with an estate planning attorney in your area so he or she can review with you the benefits of preparing a will and trust, as well as how certain other estate planning documents including a financial durable power of attorney and a health care durable power of attorney, can benefit you. Good luck.