Although seemingly a loving act, make sure you review the pros and cons of leaving your home to family.
Leaving your home to a family member may sound simple enough. Still, there are several things to consider before finalizing your decision. Generally, real estate isn’t left to a specific person in estate planning documents (such as your will or living trust). Instead, it is considered part of the residual estate. However, there are cases where someone may want to leave their home to a specific person or multiple people.
For example, a parent might have language in their estate planning documents that says, “I leave my estate in equal portions to my three children,” without any separate mention of the home. Under those circumstances, the house, just like any other estate asset, would go to the three children equally. The three children could then decide to keep the home and co-own it, or sell it and divide the proceeds according to their ownership interest.
There are a number of reasons why someone would want to leave another their home versus commingling it with the rest of the estate. Perhaps you have a family member who has been down on their luck who will be homeless if you don’t leave them your property. Or perhaps a family member lived with you in your home and helped take care of you, and as a result, you want to leave that family member your home. So, what are the decisions involved in leaving your house to a family member or other person?
If you’re considering leaving your home to a family member, you may be wondering if it makes sense to gift your house to that person before you pass away. This could make sense in some cases. However, there are a few drawbacks to consider before choosing this option.
First, if you gift your home to someone while you’re still living there, it’s still considered your residence. Therefore, when your family member goes to sell the house, they will not get to take advantage of the $250,000 exclusion from capital gains tax (or $500,000 exclusion if they’re married). If they were the owner and the resident at the time of sale, they would be able to take advantage of this beneficial tax treatment—known as the “step-up” in cost basis rule.
Since they are not living in the home, they will be subject to a carry-over capital gains tax instead of the step-up in basis if they inherited the house after your death. For example, let’s say you bought your home for $100,000, but it’s now worth $400,000. If you gift the property to someone during your lifetime, your family member’s capital gains tax basis will be the same as your basis—$100,000.
However, if you allow your family member to inherit the home when you die, the recipient will enjoy the stepped-up basis tax break. So if your home is worth $400,000 on your date of death, their basis will be $400,000, which saves them from a hefty tax bill.
So, is it better to gift or inherit property? It’s not a black and white answer, but the tax consequences of gifting a property while you’re still alive is a major drawback that may make waiting more beneficial.
Another significant disadvantage of gifting your home while you’re still alive is the uncertainty and loss of control over the property. You lose control by giving away your home during your lifetime, as you will no longer be the owner. Therefore, it’s crucial to consider what would happen if you have a falling out with your family member or if they pass away before you. Does the ownership of the home revert back to you? Or would their heirs now inherit and possibly force you out of the house?
Another consideration involves how to handle leaving a home that has a mortgage. Do you want your heir to assume the mortgage and continue making the payments? Or do you want the mortgage balance settled from the estate proceeds so your family member can inherit a debt-free home? You should clearly outline your wishes in your estate documents so your advocates know what to do.
So, let’s assume that you won’t gift your home to someone else during your lifetime, but you do want a specific person to inherit it when you pass away. Here are a few questions to help you clarify your plans.
If you are concerned about giving someone ownership rights, including the right to sell and spend the proceeds, you may want to consider leaving the house in trust for that person. You may want to consider this option if you’re concerned the family member will sell the house and misuse the proceeds.
If you leave the house to your family member in trust, they will still have the right to live in the home, but a separate trustee maintains the ownership of the property for their benefit. This way, you can have peace of mind knowing your family member won’t sell the home and blow the proceeds.
So, can you give a house to a family member? Yes, but it may be more complicated than you think, which is why proper planning is essential. Be sure to consider when it makes the most sense to gift your home (during your lifetime or after you pass away) and review the pros and cons before going with one option over the other.
Do you have an estate plan in place that outlines your specific wishes for your assets, including your home? Are you not sure which documents you need? Our free assessment will help clarify the steps to get your legal affairs in order.
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This post was written by MyAdvocate's team of estate planning attorneys.