Issues to Consider When Gifting Your House

Home ownership transfer tips for parents and their adult offspring.

By Nancy M. Rice, Esq., CELA On Oct 28, 2014

Many elderly parents wonder if it is wise to transfer their home to their children. The most common reason is to protect the house in the event one or both of the parents need nursing home care. There is no concrete answer for every family. Any advisor needs to consider Medicaid rules, capital gains tax, the financial and emotional stability of children and other factors before giving advice.

Five Year Look-Back for Medicaid. Under New Jersey Medicaid rules, if a parent transfers assets to children within five years of applying for Medicaid, the transfer will cause a penalty which does not begin until the Medicaid application is made. The length of the penalty period depends upon the value of the house. Thus, any transfer of the residence must be made well in advance of the parents’ need for nursing home care.

There are many exceptions in Medicaid rules relating to the residence. For example, the house is exempt as long as one of the parents is living in the residence. Also, transfers without penalty may be made to a “caregiver child” or a disabled child.

Further, if one of the parents is likely to need nursing home care within the next few years, it is not wise to transfer the house from a married couple (the residence is exempt as long as one of them is living in it) to children.

Capital Gains Tax. A second issue with transferring the house is the loss of a potentially significant capital gains tax advantage. The capital gains tax rate is 15 percent federal and 5 to 8 percent for New Jersey. This tax is paid on the difference between what you paid for something and what you receive when you sell it. If the parents sell the house during their lifetime(s), however, they have an exemption from this tax in the amount of $250,000 for each parent ($500,000 total).

However, if parents gift the house to the children during the parents’ lifetimes, the child/ren will pay a capital gains tax when they sell it because when the house was gifted to them, they received the property with the (“carryover”) basis of the parents. On the other hand, if the children inherit the house, the “cost basis” for the child/ren becomes the value of the house at the date of death. This is called “step-up in basis.”

Loss of Control and Children’s Creditors. A third issue with transferring the house to children is the loss of control and risk from children’s creditors. If the parents transfer the house outright to the children, then the children own the house and can do as they wish. Also, if any of the children get into financial difficulty, their creditors may be able to force the sale of the house. If any of the children get divorced, their spouse might assert a claim to part of the house.

Needless to say, the answer to this common question depends upon individual circumstances and requires competent advice.

About the Author: Nancy M. Rice, Esq., CELA, is the managing shareholder of her four attorney firm, with offices in Cherry Hill and Ocean City.

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