Frequently, parents will be encouraged to give their home to their children so the government won’t take it to pay any nursing home bills. This is usually very bad advice. Why is this not an appropriate strategy?
- By making a gift of the home, the parents no longer own the property. The child or children now own this home. They can decide who lives in the property. If they no longer want you in what used to be your home, they can kick you out. That hurts.
- The children will take over the home at the parents cost basis. This means if the property is sold, the children will use their parents cost basis. This may be low and could cause the children to pay capital gains tax on the sale. If the parents sold their home that was their primary residence, a single person could exclude up to $250,000 of gain from tax. A married couple filing a joint return could exclude up to $500,000 of gain.
- The parents will have to file federal and, perhaps, a state gift tax return. It’s likely a gift tax won’t be due, but a gift tax return will still need to be filed.
Most parents should keep their home in their name and not give it to their children. When the parents pass away, the house will be included in their estate. The value will be at the fair market value at their date of death. This is a tax advantage over gifting to the children and potentially having them pay capital gains tax.
If for whatever reason you believe you MUST gift your home to your children, be sure to maintain life use. This means you have the right to live in the home as long as you live.
ACTION ITEM: Parents need to be cautious when gifting their home to their children. Instead of an outright gift, consider making the gift but retaining life use.
Thomas F. Scanlon, CPA, CFP®
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