WHAT ARE THE OWNERSHIP AND TAX CONSEQUENCES OF GIFTING MY HOME TO MY CHILD DURING MY LIFETIME?

What are the ownership and tax consequences of gifting my home to my child during my lifetime?
 
By Steve & Kiley Stuchlik, Attorneys at Law
 
Last month, we mentioned that one should not engage in DIY estate planning through the execution of deeds to make a lifetime transfer of real property without first obtaining the advice of an attorney.  We noted that there are ownership and tax consequences to transferring title to real property.  Many parents of adult children ask us about simply deeding (gifting) their home to their children during their lifetime as a way to avoid probate and/or avoid the state putting a lien on their home for the cost of the parents’ medical care (e.g. Medicaid). 
 
While those objectives may be accomplished, there are many consequences to a lifetime transfer of real property such that in most cases, gifting your house to your child now, via execution of a deed and without payment of a fair purchase price, is NOT the best option. While some states, such as Oregon, allow for a transfer on death deed meaning that the property is not transferred during the owner’s lifetime but rather, the transfer occurs automatically upon the owner’s death to the person designated in the deed, Idaho does not allow for a transfer on death deed.
 
The only circumstance when deeding your house to your child during your lifetime without payment of a fair purchase price is an ok option is when all of the following facts are true (and even then, a person should seek competent legal and tax counsel before proceeding): 
 

1. You own the house free and clear of any debt; 
2.  Your child intends to make the house his or her principal residence; 
3. You want to transfer ownership of the house to your child;
4. You are ok with filing a gift tax return to declare the gift with the IRS; and 
5.  You and your spouse are very unlikely to need and/or qualify for Medicaid (government funded long-term care) in the next five years.

 
And now for the reasons why deeding the house to your child during your lifetime without payment of a fair purchase price is most likely not the best option:
 

1. If you have debt on your house, by deeding it to your child, you are transferring ownership of the house and could, therefore, trigger the due-on-sale clause in your mortgage or deed of trust.
2. By deeding the house to your child now, you are making a current gift, meaning that your child will not benefit from the step-up-in-basis that he or she would enjoy had he or she inherited the house at your death. For example: you bought your  house for $100,000 and give it to your child during your life.  Child later sells the house for $300,000. Your child may have to pay capital gains taxes on the gain of $200,000.  If you do not gift the house and die with the house being worth $300,000 at the date of your death and your child inherits the house, your child gets a “step-up-in-basis” to the value of your house at the date of your death. Meaning that if your child sells the house for $300,000, the gain is $0 and there are not capital gains tax concerns. As Federal law currently stands, this is a very important consideration for the proposed recipients of any lifetime gift. 
   
3. When you deed your interest in your house, you are transferring ownership to your child.  By transferring ownership, besides potentially triggering a due-on-sale clause in your mortgage, you have triggered the following consequences: the house is subject to execution by your child’s creditors; your child can sell the house; your child can evict you from the house; your child can allow others to reside in the house; and you will no longer qualify for a homeowner’s property tax exemption.  
4. Making a present gift means that you are likely going to have to file gift tax return to declare the gift with the IRS.
5. If you or your spouse apply for Medicaid, you are going to have to declare on the application whether you have made any gifts in the preceding five years. If you have to declare that you made a gift of a house, then you will be subject to a penalty period and unable to qualify for Medicaid until the penalty period has run. (The penalty period is calculated based on the value of the gift and the average monthly cost for care). In the alternative, you could have an awkward conversation with your child and ask him or her to deed the house back to you in order to cure the gift and qualify for Medicaid sooner. 

​If your circumstances are such that gifting your home is an ok option, then you should consult competent tax and legal counsel to assist with the transfer.  If gifting is not an ok option for you, then you should consider consulting with legal and tax counsel to engage in estate planning in order to pass your home onto your children without the potential ownership and tax consequences of a lifetime gift.