How to Give Away Your Home

A common estate planning question is whether it is better to allow your heirs to inherit your home, or give it to them as a gift. This article in the Los Angeles Times addresses that question.

Generally, it is better to let your child inherit homes that have appreciated in value since your original purchase. For homes that have not increased in value or have even decreased in value, it doesn’t matter whether you give the property to your children as a gift or allow them to inherit it.

To illustrate, if you give your home away as a gift, the recipient’s cost basis is the same basis as yours. For example, if you purchased your home for $25,000 and then gifted it to your child, your child’s basis in the home would be $25,000. If your child later sells the house when it is worth $100,000, he or she would have to pay capital gains tax on the profit of $75,000.

On the other hand, when your child inherits your home, he or she takes a “stepped-up” basis for the home. A “stepped-up” basis is essentially the fair market value of the home at the time of your death. So, if your same $25,000 house was worth $50,000 when you died, your child would have a $50,000 basis in the house. If the child were to then sell the home shortly after your death, he or she would likely pay no federal income taxes on the sale, since the basis would hypothetically be the same as the sale price.

The answer to how you should give away your home will be based on factors specific to your situation. If you have questions about how to transfer your home to your children, it is important to speak with an experienced estate planning attorney.