Should I gift my house to my son now, or when I die?

It is usually better for your heirs to inherit real estate at your death rather than to receive it as a gift from you during your life. This is because it is tax efficient for the property to pass at death due to the “stepped up basis” for capital gains tax purposes.

The cost basis of a property is the amount you purchased it for or, if you inherited from someone else, the value at the date of death when it transferred to you. When property is sold, there is a tax on the difference between the cost basis and the sale price—this is called a capital gains tax. When you sell your primary residence, a portion of this gain is excluded, $250,000 per individual or $500,000 for a couple. The cost of capital improvements to the home while you owned it are also excluded from the gain. Upon your death, any gain is wiped out and the new cost basis is the value of the property at your date of death. If your son sells it right after your death, there will be no capital gain… no tax.

Let’s use a simple example to explain tax basis in property: You bought your house 50 years ago for $200,000 and now the fair market value of the house is worth $1,000,000. If you and your spouse sell during your lifetime, you will pay capital gains tax on $300,000 of gain (the difference between purchase and sale, less the $500,000 primary residence exclusion for the couple). If you gift your house to your son while you are alive, your son will inherit your same basis in the property, i.e., $200,000. Thus, if your son decides to sell the house at any time, he will have to pay over 30% in Federal and New York State capital gains tax on the $800,000 increase in value; this could be over $260,000 paid out of the proceeds.

However, if you pass away owning your home, the property gets the step up in basis to the fair market value as of your date of death. If you leave the house to your son, he’ll inherit the property with the stepped up basis. If he sells it now, he will completely avoid capital gains tax liability.

While it may be tempting to gift your house now, there are tax consequences in doing so. Leaving your house to pass to your son after death may be the better option here, especially if you plan on living there for the rest of your life. While taxes are just one piece of the puzzle, your planning with the house, perhaps your largest asset, deserves the time and considerations of an estate planning and elder law attorney who can guide you to the best decision for you and your son.

Author: Britt Burner, Esq.