Should I Transfer My Home To My Children?

JANUARY 1, 2022

Following is an excerpt from a talk David Stone gave recently at the West Shore Senior Center in New Cumberland regarding transferring one’s home.

At least weekly, I take a phone call from a client asking me, “Should I transfer my house to my kids? My neighbor just did it and she says the kids are going to save in taxes.” This is a question that does not have a simple answer. Each person’s circumstances may dictate a different outcome. What is certain is that it is never as easy as saying that if I transfer my house to my kids, they will save taxes because they won’t have to pay inheritance or estate tax.

Understanding some basic transfer rules and inheritance and income tax rules will help. Generally, when you sell your home, none of the proceeds are taxable. There are exceptions to this general rule if you haven’t lived in the property for at least two years, or if your profit exceeds $250,000 for a single or if you used the property for business or rental purposes. As for inheritance and estate tax, there is a 4.5% inheritance tax on property passing to your children or grandchildren. Federal estate taxes don’t affect estates smaller that five million dollars (this threshold may drop to one million on January 1, 2013). So if you transfer the house to your kids and you live there for the rest of your life, your kids will save on the 4.5% inheritance but they may have to pay income tax on some of the proceeds when they sell your house after you are gone. This income tax may greatly exceed what they would have paid in inheritance tax.

An additional twist may result if you decide to downsize and sell your house after you transfer it to your kids. Then, it is your kids selling the house, not yourself. They may owe significant income taxes resulting in fewer dollars available for your downsized home.

There are other pitfalls in a transfer as well. Remember, after you transfer your house, you don’t own it any longer. Your kids could sell it; they could mortgage it; any judgment against them may become a lien against it; and your house may become an asset in their divorce to divided up.

On the plus side, the transfer will save the inheritance tax. Also, it may protect the house if you were to have to go into a nursing home, although there is a look back period of five years before you may become eligible for Medicaid paid nursing home care.

As you can see, this is not a simple issue and it is one that should be reviewed periodically. This article has greatly simplified some complicated rules. Before making any such decision, please contact our office so that all the possible pros and cons may be explored and discussed.

Copyright 2012 by Stone LaFaver & Shekletski

The information provided in this article is general information and is not meant to offer legal advice. While the writer believes the information to be current, laws and statutes may have been changed since the posting of this article. No attorney client relationship has been created in the posting of this article. Stone LaFaver & Shekletski assumes no liability for the contents of this article nor for any consequences for damages resulting from the reliance thereon.