Since your home is often one of your most important assets as you enter retirement, what you do with your home can be a major consideration, with significant income tax and other effects. You may decide to keep the home in your name and continue living in the home, or you might sell the home and move to another location or downsize. You might also be considering transferring title to the home to a family member or to a trust.
According to the IRS, if you sell your home you could generally exclude any gain on the sale up to $250,000 or up to $500,000 if you are married filing jointly. To be able to exclude the gain you must have owned and lived in the home as your main home for at least two years during the last five years.
If you decide to keep the home and pass it on to a family member or other heir, the home passes at the fair market value at the date of death. This stepped-up basis could avoid a significant capital gain to your heir if the home is later sold, especially if you have owned the home for a long time and the value has increased considerably.
If you put another name on the title deed to the home, essentially as a gift of partial ownership, and keep your name on the title you would have to file a gift tax return if the value is over the annual exclusion amount ($14,000 for 2014). You would not have to pay tax, but the amount of the gift would decrease the lifetime unified estate and gift tax exemption ($5.34 million in 2014).
In this case, if you were to sell the home, your portion of the gain may not be taxable due to the exclusion mentioned above. But the co-owner could be subject to tax on his or her share of the gain since there is no step-up in basis. The gain would be the co-owner’s share of the proceeds from the sale less his or her share of the basis. The basis would be the original cost of the home plus or minus any subsequent adjustments.
If you transfer the deed to the house to a family member or someone else, but you retain a life interest (life estate), you could continue to live in the home. You would generally be responsible for property taxes, insurance, repairs and maintenance, and you may qualify to claim a state property tax credit. Transferring title could present a risk if the person who takes title to the home is divorced, sued, or files for bankruptcy.
In the case of a life estate the full value of the house would go into your estate. The heir(s) would take title upon death and would inherit the home at the “stepped-up” value at that time, avoiding capital gain on the increase in value since the original purchase. If the home is sold before death, the capital gain would be divided between you and the heir. You may be able to exclude the gain on the sale of your main home but the heir’s capital gain could be taxable.
If you put the home in a trust, the tax consequences would depend on how the trust is set up. If you set up an irrevocable trust, the home in the trust would generally go to the beneficiaries at the stepped-up value, avoiding capital gain for tax purposes on the eventual sale.
If you eventually need or decide to go into a nursing home and your other financial resources are not enough to pay for the cost of nursing home care, how you have handled the ownership of your home could affect your eligibility for Medicaid benefits.
If you keep title to the home in your name, the home could be subject to a lien to pay nursing home costs from the proceeds of sale. But as pointed out in Elder Law Answers, there are some exceptions. For example, your home would be excluded from your personal assets for Medicaid eligibility purposes if it was transferred to your spouse or to a child who lived in the home for two years and provided care that kept you from having to go to a nursing home.
If you decide to transfer title to your home, you should keep in mind that there is a five-year look-back period for determining eligibility for Medicaid. If you made any gifts or transfers in the last five years before applying for Medicaid benefits, Medicaid will calculate a period of ineligibility based on the value of the assets transferred.
If you place your home into a trust, your eligibility for Medicaid benefits would depend on a number of factors, such as the type of trust, who established it, whose assets funded the trust, whether the trust is revocable or irrevocable, and the provisions of the trust agreement.
Medicaid’s Asset Transfer Rules, Elder Law Answers
Medicaid’s Power to Recoup Benefits Paid: Estate Recovery and Liens, Elder Law Answers
Publication 523, Selling Your Home, IRS
Rules to Transfer Assets for Medicaid Look-Back Periods, Lawyers.com