Should I Transfer My Home to My Child
As an elder law attorney, one of the questions I am most frequently asked is, “Should I transfer my home to my child?” My answer is always the same, “It depends on the goal you are trying to accomplish.” This article will discuss some of the issues you need to consider before deciding whether to transfer your home to a child.
When you transfer your home to a child for nominal consideration such as One ($1.00) Dollar, you are essentially gifting the property to him or her. At the moment you sign the deed, you no longer own your home. Your child is now the titled owner. If you continue to live in the property and you have a falling out with your child, he or she can take legal action to have you removed from the property and then sell it. Also, what happens if your child experiences financial troubles and creditors obtain a court judgment against him or her? The judgment can act as a lien on the property, and the creditors can force a sale of the property to satisfy the judgment. If you are still living in the property at the time, you will be forced to find another place to live.
Transferring your home to a child can cause him or her to have to pay capital gains taxes when the property is sold. When you transfer your property to your child, her or she takes your tax basis in the property. The tax basis is usually the purchase price of the property, plus the costs of any improvements you made to the property during the time you owned it. When your child sells the property, he or she will have to pay capital gains taxes on the difference between the selling price and the property’s tax basis. Currently, the long-term capital gains tax rate is 10% to 15%, depending on your tax bracket.
An exception to the above-cited rule applies if your child owns and lives in the property for two (2) of the last five (5) years before he or she sells it. In that case, the property will be considered the child’s primary residence and there will be no capital gains taxes due so long as your child’s gain on the sale of the property is not more than $250,000. This amount is increased to $500,000 for a married couple.
If you do not transfer your home to your child during your lifetime, but instead, he or she inherits it at your death, then your child will receive a step-up in the property’s tax basis. The step-up in tax basis is the fair market value (FMV) of the property on the date of your death. If your child then sells the property, he or she will only have to pay capital gains taxes if the property sells for more than its FMV. Your child will, however, have to pay Pennsylvania inheritance taxes at the rate of 4.5% of your net estate. This rate is significantly lower than the 10% – 15% capital gains tax rate.
If nursing home admission becomes a reality for you, you may consider transferring your home to your child to keep from losing it to pay nursing home costs. As a nursing home resident, you can apply for Medicaid benefits when your financial resources have been spent down. For a single person, this amount is usually $2,400.00.
When you apply for Medicaid, the Commonwealth of Pennsylvania will look back three (3) years to determine if you have transferred any resources without fair consideration. If you have, you will be ineligible for Medicaid for a period of one (1) month for every $5,787.38 transferred, from the date of the transfer. As an example, if the FMV of your home is $100,000 and you transfer your home to your child in December 2004, you will be ineligible for Medicaid for seventeen (17) months, or until May 2006. Therefore, you will need additional financial resources to pay the nursing home costs during the seventeen (17) months in which you are ineligible for Medicaid.
In the above situation, if you transfer your home to your child and then die in the nursing home after becoming eligible for Medicaid benefits, the Commonwealth of Pennsylvania will not be able to use the property to collect its claim for the amount of Medicaid benefits they paid to the nursing home. However, if you do not transfer your home to your child and then die in the nursing home, the Commonwealth will be able to use the property to satisfy its claim before your heirs receive anything.
When deciding whether to transfer your home to a child, you need to ask yourself, “What goal am I trying to accomplish?” Such a transfer may be a good or bad idea depending on your answer to that question. This article has examined some of the issues you need to consider before making your decision. It is not an all-inclusive examination. Depending on your specific situation, the issues examined in this article may need to be amplified, or other issues may need to be considered. As such, you should consult your legal advisor before making any decision to transfer your home to your child.