Estate Planning: Why Gifting a Home to a Child Can Be a Costly Mistake
Many aging parents look for ways to transfer their home to an adult child while avoiding probate or protecting assets in case long-term care is needed. One strategy that often comes up is gifting a home to a child or selling it for a nominal amount, such as one dollar. But according to elder law attorney Harry Margolis, this approach frequently creates serious financial, tax, and legal problems.
“We usually say no,” Margolis said, explaining that gifting a home to a child exposes the property to risks that most families never anticipate.
In an interview addressing common questions from his Ask Harry column, Margolis explained why gifting a home rarely delivers the intended benefits—and why waiting until death often produces far better results.
Gifting a Home to a Child Creates Legal and Financial Risk
Parents sometimes add a child’s name to the deed to avoid probate or prepare for Medicaid eligibility. But once gifting a home to a child occurs, the property immediately becomes vulnerable.
If the child experiences a divorce, lawsuit, bankruptcy, serious illness, or dies without an estate plan, the home can be lost or transferred in ways the parent never intended. In those cases, the parent may lose control of the home entirely.
According to Margolis, these risks often far outweigh any perceived benefit.
The Capital Gains Tax Problem Most Families Miss
The most significant downside of gifting a home to a child is the capital gains tax exposure when the home is eventually sold.
When a home is gifted during the parent’s lifetime, the child inherits the parent’s original tax basis—typically the purchase price plus the cost of improvements. If the child later sells the home and it is not their primary residence, substantial capital gains taxes may be due.
For example:
-
Purchase price: $200,000
-
Improvements: $100,000
-
Sale price: $700,000
-
Taxable gain: $400,000
Margolis explained that between federal and state taxes, that gain could result in a tax bill of roughly $80,000 or more.
That tax liability is certain—while the Medicaid risks families are often trying to avoid may never materialize.
Step-Up in Basis: The Advantage of Waiting Until Death
The greatest financial benefit comes when a child inherits the home instead of receiving it as a gift.
Upon death, the home receives a step-up in basis to its fair market value. If the home is worth $800,000 at death, the child’s new basis becomes $800,000. If the child sells the home shortly thereafter, there may be little to no capital gains tax.
Margolis emphasized that selling the home to a child for a dollar does not avoid this issue.
“It’s really just a gift,” he said. “That doesn’t mean the basis gets reduced to a dollar.”
Better Alternatives to Gifting a Home to a Child
Families who want to avoid probate or plan for Medicaid have safer options that preserve the step-up in basis:
Life Estate
Parents transfer the home but retain the right to live there for life. This can avoid probate and preserve tax benefits.
Ladybird Deed
Available in many states, a ladybird deed allows the home to transfer automatically at death while the parent retains full control during life.
Trusts
-
Revocable trusts avoid probate
-
Irrevocable trusts may offer Medicaid protection in certain cases, but require careful planning
Each option has different legal and Medicaid implications depending on state law.
Actionable Advice for Families
-
Do not gift or sell the home for a dollar
This creates tax exposure, legal risk, and loss of control. -
Preserve the step-up in basis
Life estates, ladybird deeds, and properly structured trusts can protect children from capital gains taxes. -
Align family goals
Probate avoidance, Medicaid planning, and tax efficiency affect different family members in different ways. -
Consult an elder law attorney
State-specific rules make professional guidance essential.