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The Dangers of Gifting Real Estate as an Estating Planning Strategy

Posted by attorney Edward Brown

3 Reason Why Putting Your Home In The Kid's Name Is Not a Good Idea:

In an effort to get assets “out of their estate" to protected it from estate taxes or a nursing home , many people consider deeding their real estate to their children. This is a very risky strategy for a variety of reasons.

Capital Gains Tax

Capital gains tax applies to the sale of appreciated assets such as land or stocks. The tax is based on the profit that one earns on the sale. For example, if you buy a piece of land for $100,000 and you sell it for $225,000, you have a capital gain of $125,000. This is subject to a tax rate of 15-25% plus an additional 5% of state income tax on the gain.

Exposure to Liability

A gift of property during the owner's lifetime results in a carry-over of the original sales price to the recipient. When the recipient eventually sells, they will owe capital gains tax on the difference between the sale price and the price that the original owner paid. Depending on how much the property has appreciated over time, this could result in a stifling capital gains tax problem for the recipient.

Moreover, if the property is in the hands of someone else, it is subject to the liabilities of that person. Suppose the recipient gets sued or divorced. The entire property could be lost to pay their debts leaving you without a place to live.

5 Year Rule still applies

Finally, the Medicaid rules count a gift of any kind made within 5 years as if it is still yours. Even though you no longer own the property, you will not qualify for Medicaid until its value is “spent down."

It is very important to understand the many potential consequences of gifting any assets, particularly real estate, before embarking on such a plan. An Elder Law Attorney can explain the many complexities of gifting and asset protection and you should seek the counsel of a qualified expert in this area before taking any steps on your own.

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