Do you want to give your house to your kids? What are the tax consequences to deeding your house in Texas?
Yes, you can give away your house in Texas. The better question is should you give away your house now or wait until you pass away? Let’s weigh some of the pros and cons to giving away a house during your lifetime.
1 – Probably will not be a gift tax problem. If you give away the house in 2012, due to the $5 million gift tax exemption, the gift of a house most likely will not trigger a gift tax problem. The value of your home will be counted against your estate tax / gift tax unified credit when you make the gift, but that’s only a problem if the total value of your estate exceeds $5 million. Essentially, as the federal law stands today, each American has a $5 million credit against taxation of gifts and estates. This means you can give away $5 million worth of property without tax. If you give away a house worth $1 million, you’ll have $4 million in exemption remaining.
All that means is that the vast majority of us would not have a gift tax problem giving a house away. Gift taxes and estate taxes can be very complicated, and the laws are constantly in flux. For more info on the current laws, consult the IRS website HERE.
2 – It’s fairly easy to give your house to someone in Texas. The best way to give away your house is to get in touch with an attorney to draw up the deed and then record the deed with the county clerk. If you just give away the house now, you won’t worry with revocable trusts and the like. It’s pretty simple to deed your house to someone in Texas.
1 – There will be a “tax basis” problem. If you give away your house during your life, the recipient gets your adjusted tax basis for capital gains purposes. However, if you give away your house upon your death, the recipient inherits the house with a tax basis equal to the fair market value at the date of death. This can have significant tax repercussions to the recipient. For example, if you purchased your home 20 years ago for $50,000, and it’s worth $250,000 upon your death, if you give away the house while you’re alive, the recipient will potentially have to pay capital gains tax on a whopping $200,000! On the other hand, if the recipient had instead inherited the home upon your death, the recipient would have virtually no capital gains tax consequence. Read more from the IRS website HERE.
How big a deal is capital gains tax on an inherited property? Consider the above example. If the recipient has to pay capital gains tax on $200,000, and the recipient is in the 15% capital gains tax bracket, that’s $30,000. Essentially, if you had waited to give the house to the recipient until your death, you could have potentially saved the recipient $30,000 in taxes.
2 – Potential Medicaid Penalty. Medicaid frowns upon transfers of property in certain situations. Medicaid is a need-based program, which means that they look to your assets to see if you’re eligible; if you have enough property to pay for your health care yourself, then Medicaid won’t give assistance. To discourage people from giving away property in order to become eligible for Medicaid, Medicaid has a 5-year “lookback” period. That means property transfers within five years of applying to receive Medicaid benefits could result in a penalty or delay in benefits.
But, if you don’t transfer your house, won’t the house make you ineligible for Medicaid, though? No, not if it’s your homestead. Medicaid doesn’t factor in the value of your homestead when calculating eligibility. So, if you transfer your homestead now you could be subject to Medicaid penalty, but if you keep the homestead it likely won’t impact your eligibility.
3 – It’s fairly easy to transfer the property to your heirs upon your death, especially with a valid Texas Last Will and Testament.
There are many more pros and cons to deeding a house to a child or other recipient during your lifetime. Also, you may also want to consider a Lady Bird Deed or a revocable trust (“living trust”) to transfer ownership. For all these reasons, before deciding to get in a hurry to give your house away, consider contacting an estate planner, estate planning attorney, financial adviser, and/or an accountant.
Shutt Law Firm provides free initial consultations. If you are considering deeding your house, a Lady Bird Deed, a Living Trust in Dallas, Dallas Last Will and Testament, or other Texas estate planning assistance, consider contacting an elder law lawyer in Dallas, TX (or Richardson, TX, Plano, TX, McKinney, TX, Addison, TX, Frisco, TX, Collin County, Dallas County, or surrounding vicinity). If you have other questions about this informational law article, contact Isaac Shutt, attorney Richardson, TX, for a free legal consultation.
Visit www.ShuttLawFirm.com for more information on Texas Wills, avoiding probate in Texas, Texas trusts, estate planning, probate, alternatives to probate, and guardianship–or email firstname.lastname@example.org. You can also call Mr. Shutt at (214) 302-8197 for more information on the topic discussed in this blog or to discuss a different legal matter. Phone-calls and quick e-mails are always free at Shutt Law Firm PLLC. Please consider the Shutt Law Firm if you’re looking for a Plano lawyer for probate, Plano Wills Lawyer, Plano estate planning attorney, power of attorney in Plano, TX, or guardianship attorney in Plano area.