The wrong way to pass along a home

January 18, 2008

I want to put my home, which I own free and clear, in my adult son's name. That way it will be out of my estate and he'll get it directly when I die. Are there any other tax consequences I should know about?

I want to put my home, which I own free and clear, in my adult son's name. That way it will be out of my estate and he'll get it directly when I die. Are there any other tax consequences I should know about?

Yes. For starters, you'd be gifting the house to your son. That means you'd have to file a gift tax return and, depending on how much you've already given away, the transfer may be taxable. And your son's basis in the property would be your adjusted basis plus part or all of the gift tax, rather than the property's fair market value at the time of your death, which means he could have a larger capital gain than he would if he inherited the property from you instead. Moreover, if your son decides to sell the home rather than live in it after you die, he could get hit with a nasty capital gains tax bill. To avoid capital gains tax on the property, he must qualify for the home sale capital gain exclusion ($250,000 for single taxpayers, $500,000 for married couples who file jointly).

That means he has to own the home and make it his principal residence for at least two of the five years before he sells it. (If he's married, his wife also must live in the home for at least two years but needn't own it.) So you might want to put the house into a personal residence trust in his name instead.

Send your money management questions to: MMQA Editor, Medical Economics, 123 Tice Blvd., Woodcliff Lake, NJ 07677-7664, or send an e-mail to memoney@advanstar.com (please include your regular postal address).