As you start to think about what kind of legacy you want to leave to our loved ones, it’s only natural that you should think about what to do with your our home. For many Pennsylvanians, the family home is their most valuable single asset. And, with the cost of housing getting out of reach of many younger people, it might seem like a good idea to simply give their homes to their adult children.
You may have the best of intentions, but if you’re not careful, this type of gift can cause a lot of problems.
A gift while you’re alive
There are several potential problems with the idea of gifting your home to your children while you are still alive. Some of the most serious problems involve the tax consequences. And perhaps the most serious potential tax trap involves your home’s gain in value over the years.
When a person sells their home, they typically owe taxes on the profit they made. So, if you bought your home 20 years ago for $300,000, and you sell it today for $600,000, you could be taxed on that $300,000 gain. If, instead of selling, you give your home to your daughter, her cost basis is the same as yours: $300,000. If she decides to sell the home 10 years from now for $1 million, she will likely be taxed on a $700,000 gain. That could be enough to make the process a lot harder for her.
By contrast, if you gave the home to your daughter in your will, her cost basis is calculated according to the fair market value of the home at the time she inherits it. In our example, this would mean her cost basis is $600,000. If she sells it in 10 years for $1 million, she will be taxed on a gain of $400,000 instead of $700,000.
Get professional advice
The tax issue we’ve been discussing here is just one of many potential problems with gifting a home, but there are ways to keep your home in your family. Professionals with experience in estate planning can help you assess your options.
