Q: Can you gift Real Estate to your children without paying taxes?
A: Many parents want to transfer their home to their children during their lifetime. It may seem simple to sign a new deed and be done, but gifting real estate can have tax and legal consequences that may cost your family more in the long run. Before making a transfer, it is important to understand what you may be giving up. When you gift your home during life, your child receives your original cost basis, meaning what you paid for the property. If the home has increased in value, your child could face significant capital gains tax if they decide to sell it. Property that passes at death, on the other hand, receives a “step-up” in basis to fair market value at the time of death, often eliminating or greatly reducing capital gains tax for your beneficiaries.
There are also Medicaid implications to consider. Under New York’s five-year look-back period, transferring your home could make you ineligible for Medicaid coverage if you need long-term care in a nursing facility within five years of the gift. The value of the home is treated as a transfer, which can create a penalty period of ineligibility.
Some parents choose to keep a life estate, which allows them to live in the property for the rest of their lives while giving the remainder to their children. While this preserves the step-up in basis at death, it can make selling or refinancing more complicated because all parties must agree to the transaction. Another concern arises if a child passes away before the parent. Because the child’s interest as a remainderman cannot be changed once the deed is recorded, ownership may pass to the child’s surviving spouse or estate, creating unintended consequences for the family.
In many cases, placing the property into a trust or family LLC provides a better long-term result. A Revocable Trust allows you to keep control of your home during your lifetime and transfer it to your beneficiaries without probate. Real estate can also be placed in an irrevocable Medicaid asset protection trust to add protection for Medicaid eligibility. While not the best option for your primary residence, a family LLC can also be useful when several family members will share ownership of a second home or investment property.
The LLC owns the real estate, and each member holds a percentage of ownership in the company. This structure helps clarify management responsibilities and makes future transfers easier.Before transferring real estate to your children, speak with an estate planning attorney and a tax professional. Taking the time to plan now can help preserve your home and prevent future complications for your family.
- Alma Muharemovic Esq. and Britt Burner, Esq. Alma Muharemovic, Esq. is an associate attorney at Burner Prudenti Law, P.C. focusing her practice areas on Estate Planning. Britt Burner, Esq. is the Managing Partner at Burner Prudenti Law, P.C. focusing her practice areas on Estate Planning and Elder Law. Burner Prudenti Law, P.C. serves clients from New York City to the east end of Long Island with offices located in East Setauket, Westhampton Beach, Manhattan and East Hampton.