Many people mistakenly believe they can transfer their home to their children while retaining the right to continue living in it for the rest of their life, and remove the home’s value from their taxable estate. But in fact, retaining such a “life estate” guarantees that the home’s value will be included in your taxable estate when you die. This means that, if your estate exceeds your available exemption at your death, some or all of your home’s value will be subject to estate taxes.
If instead you give your home to your children outright, you’ll remove it from your taxable estate — but your children will take over your tax basis in the property. So if the home has appreciated significantly, your children won’t be able to sell it without triggering substantial capital gains taxes. On the other hand, if the home passes to your children as part of your estate, they’ll receive a stepped-up basis, which reduces potential capital gains.
To determine the best course, compare the potential tax (estate, gift and income) implications of each strategy. Retaining a life estate may be a good option if, for example, you believe that potential capital gains taxes would outweigh any estate tax savings an outright gift would create.
We would gladly answer your questions regarding transferring home ownership and help guide you through these interesting planning options.