We frequently have clients call our office and ask us to prepare a deed to gift their real estate to a family member, often a child. Most of the time, the client tells us they want to do so because “they’re going to get it anyway when I die” or because “I want them to have it in case I go into a nursing home.” When faced with these scenarios, our attorneys step in and explain the downsides to this approach and offer other solutions.

Generally speaking, when real estate is gifted the recipient of the gift gets a carryover tax basis in the property. In other words, the tax basis of the person receiving the real estate is the same as that of the person making the gift. Often parents have owned the real estate for a long time and their tax basis in the property is much lower than the current fair market value. After receiving the real estate, if the recipient sells the property they are likely to be surprised, and not in a good way, with a large capital gain tax.

For example: Dave gifts real estate he’s owned since 1975 to his son, Dan. Dave’s tax basis in the property is $50,000 and that becomes Dan’s tax basis in the property. Dan keeps the property for a couple of years and then sells it for $350,000. Dan is shocked when his accountant tells him he now owes significant capital gain taxes on his $300,000 gain.

When faced with clients wanting to gift real estate to loved ones, our attorneys often recommend leaving the property to the loved one in a will or a trust. Property passing to loved ones through wills or trusts enable the recipient to get a “stepped up” tax basis. In other words, the recipient’s tax basis becomes the value of the real property when it passes to them through the will or trust.

To revisit our example above, assume that instead of giving the real estate to Dan, Dave left the property to Dan via his revocable living trust. Upon Dave’s death, Dan inherits the property from the trust. Dan’s tax basis is the value of the property when it came to him from the trust, say, $350,000. If Dan then sells the property for that amount, he owes no capital gain tax because he sold it for the same value it had at the time he inherited the property.

There can be no doubt, proper planning with a qualified attorney can amount to significant savings. Further, careful drafting of a trust can protect the property from the nursing home if Dave were to require long-term care.

There are scenarios where outright gifts of real estate making sense, but the key is to be informed of your options by consulting a qualified estate planning attorney who can properly advise you on the best option for your situation.   

The estate planning and real estate attorneys at Skeeters, Bennett, Wilson & Humphrey have been helping clients with these kinds of issues for 48 years. We are happy to help with all of your estate planning and real estate needs to ensure that you’re making the best choices for you and your family.