Should You Sell A House Or Transfer For The Kids?
For many people who are at or near retirement, the house is one of the biggest financial assets. It can be complicated to deal with in estate planning. You may be wondering: Is it better to sell the house first or transfer it to the kids using a will or a trust? Here, our Boston estate planning attorney provides an overview of the key considerations for dealing with a house in Massachusetts.
The Four Big Considerations for How to Handle a House in an Estate Plan
Consideration #1: The Capital Gains Tax
A lifetime transfer of a house to children can create significant capital gains tax consequences. Under federal tax law, a gift of real property carries the donor’s cost basis. If parents purchased a home decades ago at a low price, the children will take that same basis if the property is transferred during the parents’ lifetime. When the children later sell the house, the taxable gain will be calculated based on the difference between the sale price and the original purchase price, that is the tax basis that carried over from the parent’s original purchase price. If the parents sell the property on their own, they may or may not have capital gains tax liability. It will depend on the value of their gain compared to the available exclusion. Currently, Section 121 of the Internal Revenue Code provides each owner a $250,000 capital gains tax exclusion. So, if the parents purchaed their home at $30,000 in 1978, but that house is now worth $800,000 in 2026. They have a potential gain of $770,000. The original price of $30,000 is their cost basis; this figure can be increased by capital improvements made throughout the year. So, in our example, this couple put on a new roof at $15,000, sided their home at $20,000, remodeled a kitchen a two baths at $100,000, their tax basis has increased from $30,000 to $165,000. Adding on the capital gains tax exclusion, they will pay capital gains tax, most likely at the 15% rate, on the $105,000 for a capital gains tax liability of $ 15,750. In contrast, the two children gifted the property but have not lived at this address for two of the last five years, will have a cost basis of $165,000 and each will have to pay capital gains taxes on their share of 605,000. If one child is in a higher tax bracket, their share of $302,500 could equate to a bill of $60,500. By contrast, property that passes to heirs (or the two children in our example) at death generally receives a step-up in basis to fair market value, which in the example is $800,000, and if they sell soon after the surviving parent’s death, there is no capital gax taxes due. Gifting of your primary residence is not an attractive option when looked at from the perspective of potential capital gains tax liability.
Consideration #2: Probate Issues and Title Transfer
Massachusetts probate law also plays a role in determining whether a home should be transferred before death. If a house remains titled solely in the decedent’s name, it generally must pass through probate administration in the Massachusetts Probate and Family Court. Probate can delay the transfer of the property and may require formal court oversight of the estate. Some families seek to avoid probate by transferring the home to children during the parent’s lifetime. Of course, that could come with unfavorable tax consequences in some cases as noted above An alternative option for some families is putting the family home in a trust.
Consideration #3: Medicaid Eligibility and Long-Term Care Planning
Asset protection matters. It is an important part of developing an overall estate planning strategy. Long-term care planning is another major factor when deciding whether to transfer a home. Medicaid rules impose a five-year lookback period for asset transfers. If a homeowner transfers a house to children for less than fair market value and later applies for Medicaid to pay for nursing home care, if the transfer occurred during the five years just prior to the application, the application will be denied and a penalty period imposed. During the penalty period, the appliant is ineligible for MassHealth and has to pay for needed care at the private pay rate, with typical costs in the greater Boston area of $16,500 to $21,000 per month. It may be best to transfer a home into a trust well before any long-term care need arises. If no preplanning has been done, the home will be an exempt asset for eligibility purposes, but if the house is part of the applicant’s or Medicaid recipient’s probate, then the state is entitled to be reimbursed for the total benefits provided to the member during his or her lifetime. In short, if there is equity in the home, any proceeds received by the children will be reduced by the amount paid back, called the lien recovery, to the state. Preplanning, especially with regard to the primary residence, is essential. In addition, the Section 121 capital gains tax exclusion or step up in basis at death for property held in a Medicaid asset protection trust is available. In essence, the use of trust for long term care purposes and capital gains taxes can be a win-win scenario.
Consideration #4: Liquidity, Maintenance Costs, and Family Dynamics
Finally, there are also other financial and practical considerations that influence the decision to sell a home or transfer it to children. A large house can carry major ongoing costs, including property taxes, insurance premiums, utilities, and maintenance expenses. For retirees living on fixed income, these obligations can become difficult to sustain. Selling the home may allow parents to convert a non-liquid asset into cash that can support retirement needs or fund long-term care planning. On the other hand, some families prefer to keep the property for sentimental reasons or future family use. The specific preferences (and dynamics) of a family will influence the best strategy for dealing with the home.
Contact Our Boston Estate Planning Lawyer Today
At Fisher Law LLC, our Boston estate planning attorney is standing by, ready to protect your rights and your interests. If you have any questions about dealing with a house as part of your estate plan, please do not hesitate to contact us for a strictly confidential consultation. Our firm provides estate planning services throughout the Greater Boston area.
