Many seniors are thinking they can avoid probate, reduce their estate and directly gifting their home to their children with a quick claim deed or just add their name to the deed. This can be done, BUT!!… giving away your residence can have major tax consequences, among other possible estate problems if it is not transferred properly!
Transferring property with a value over $14,000 in any one year requires you to pay a gift tax. However, currently, you can gift a total of $5,450 million over your lifetime without being taxed but you must file an IRS Form 709 Gift Tax Return to document it. This allows you to not pay the gift tax if you file the gift tax form. You may not be taxed by the gifting through the IRS Form, however; if the house is resold by your children quickly, they will have to pay capital gains taxes. If you gift the house to your child, the tax basis for the property is the same as when you owned the house. If the house is sold right away, the capital gains tax will be based on the difference between the current value of the home and the value when you owned it. To minimize this amount the children must live in the house for at least two out of the last five years. This allows them to exclude up to $250,000 or even $500,000 for a couple, of their capital gains from their taxes. Amounts above personal residence credit are taxed at 15% Federal Capital Gains Tax and 10.33% California Tax.
Inherited property is taxed differently that gifted properties before death. When your child inherits your home, the tax basis is based on the current value of the property at the time of your death. If the house is sold the basis will be the value of property at the time of death, eliminating or minimizing capital gains tax. This may not be the best solution if you intend to protect your home. If you use Medi-CAL, the Medi-CAL Recovery Department will try to recover their costs against the property when your surviving spouse dies, if the property was in the name of them at that time.
Not only is there a possible tax problem, but if you directly put the house in your child’s and they have creditor or a court judgement, you house could be taken to pay that debt! Our attorneys can help the home being protected until your death by setting up an asset protection irrevocable trust.
This for leaving your house to your children include transferring ownership to an Irrevocable Trust, with a Lifetime Occupancy Agreement to save your home from recovery and making it considered inheritance when you and your spouse pass away. It’s important to speak with an elder law attorney before you make any gifting decisions for your home. Our attorney’s can advise you to choose the best method for protecting your assets and the proper transfer of your property to your children.
There are other options for giving your house to your children, including transferring it into an Irrevocable Trust, or outright gifting accompanied by a Lifetime Occupancy Agreement, which can save your home from recovery and if written correctly, still be considered an inheritance when you (and your spouse) pass away, getting the step up in basis. So, before you gift your family home, please talk to an elder law attorney, who can advise you on the best method for asset protection and making sure your home to properly transferred to your children!
Take advantage of a free phone consultation or appointment for a free 30 minute consultation to review your individual situation and determine if you would benefit from our experience and legal services.
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