Transferring property to a child or other relative can be tricky business. Essentially, houses and other property are valuable assets, and if there is a chance you may be applying for Medicaid, some people think they can get around these penalties by selling their house for a dollar. However, this strategy can lead to a number of problems for you or your family members.
The Gift Tax and Real Estate Sales
While it may seem like you are clearing a big asset off your books by selling it to your child, the tax burden will be kept in the family.
For one, the IRS is will not recognize the transaction as a legitimate sale, and you may still be subject to either a gift or estate tax. If you sell your house for $1, the IRS will not consider this a sale, but instead a gift. So, for example, if your house is valued at $300,000 and your child buys it for $1, it is considered a gift in the amount of $299,999. You would be on the hook to pay a gift tax on the majority of this value if your estate is otherwise large enough to owe gift/estate taxes.
If after selling your house to your child for $1, they decide to sell it at fair market value, they will have to pay a capital gains tax on the property. Since the initial transfer to your child would be considered a gift, the tax basis for the property would be based on the amount that you initially purchased the house for plus the cost of any improvements – known as the adjusted basis. Say you bought your house for $50,000 and made no improvements, and your child sells it for $300,000 after buying it for $1. They would pay capital gains taxes on the $249,999 difference. Anytime you gift property, the donee gets a carryover basis.
How a Sale Could Affect Medicaid Application
Almost more importantly is the question of how selling your house for $1 could affect your ability to qualify for Medicaid in the future. If you sell your house to your child for $1 to try to spend down your assets, and then apply for Medicaid within 5-years of that transaction, you will incur a penalty that will keep you from receiving Medicaid benefits for many months when you otherwise might have received those benefits.
The bottom line is that there is no way to fully avoid paying taxes when it comes to transferring valuable properties, such as a house, to your loved ones. By working with an experienced estate planning attorney, however, you will be able to minimize the tax burden that you or your loved ones will have to pay.
Contact Miller Estate and Elder Law
At Miller Estate and Elder Law, we have many years of experience when it comes to helping people strategically transfer property to their children and loved one. To find out more, do not hesitate to give us a call at (256) 251-2137 or contact us via the brief form below.