A common estate planning question is whether it is a good idea to gift your home to your children or other loved ones for a dollar. In the Commonwealth of Pennsylvania, when there is no outstanding mortgage or other title issues, the process itself involves drafting and recording a new deed, the kind of work that our office handles on a regular basis.
Gifting in general is a valuable estate planning strategy, but you must gift strategically and carefully, and understand how this fits in with the entire estate plan. Gifting real estate in particular can have major tax consequences, among other negative results. We list them below. The best course is to speak with an attorney and/or other professional advisor first.
- GIFT TAX ISSUES: When you give anyone assets valued at more than $15,000 in any one year (figure as of 2021), you have to file a gift tax form with the IRS, Form 709. Also, under current law you have a lifetime gift exemption of over $11 million without incurring a gift tax. This is a unified gift and estate tax credit. Congress could change the gift/estate tax at any time, so keep an eye out for changes. If you are gifting the house for nominal consideration ($1), then you have nothing to worry about on the gift tax front.
- CAPITAL GAINS TAX ISSUES: But while you may not have to pay gift taxes on the gift, if your children sell the gifted house soon after they receive it, they may face steep taxes. The reason is that when you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. For example, suppose you bought the house years ago for $150,000 and it is now worth $350,000. If you give your house to your children, the tax basis will be $150,000. If the children sell the house, they will have to pay capital gains taxes on the difference between $150,000 and the selling price. The only way for your children to avoid the taxes is for them to live in the house for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes. Inherited property does not face the same taxes as gifted property. If the children were to inherit the property, the property’s tax basis would be “stepped up,” which means the basis would be the current value of the property. However, the home may be subject to PA Inheritance Taxes.
- PA INHERITANCE TAX ISSUES: Speaking of PA Inheritance Taxes, in Pennsylvania, we still have it on the books unlike many other states. To avoid PA Inheritance Taxes (the rate is 4.5% for assets passed to children or grandchildren), you can make a gift, but you must live at least one year from the time the gift was made.
- ASSET PROTECTION ISSUES: By transferring your house to your children, you are making all of their future financial and family problems YOUR problems. That means the house could end up being taken away due to their creditor issues, bankruptcy, litigation, or divorce. Would you want your son-in-law to get part of your house while you’re still living? Also, if you have a falling out with the gift recipient, you can’t arbitrarily remove their name from the deed. They are the owner legally, so please understand that before casually gifting.
- MEDICAID/LONG-TERM CARE ISSUES: Beyond the tax and family consequences, gifting a house to children can affect your eligibility for Medicaid coverage of long-term care. There are other options for giving your house to your children, including putting it in a trust or selling it to them. Before you give away your home, consult with an elder law firm such as our law firm, where we can advise you on the best method for passing on your home.
- CONCLUSION: “Gifting the house for $1” is a phrase that’s tossed around quite a bit, and several families go ahead with this planning. As you can see, casual planning like this is fraught with potential landmines. Be careful. There are options out there to transfer the house properly. Thinking about this and not sure which way to go? Schedule a consultation with Jeremy today, by calling our office at (215) 706-0200 or emailing Info@JawAtLaw.com.
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