frequently asked questions

One reason you should not gift your home or real property to your children (part 1 of 4):

One reason you should not gift your home or real property to your children (part 1 of 4):

One reason you should not gift your home or real property to your children is the loss of the step-up basis. If you gift your home or real property to your children, they receive it at the cost basis you acquired it at. If your children inherit your home or real property after you pass, they get a step-up basis in the cost. For example, let’s assume you own a home or a piece of real property that you purchased for $100,000 several years ago but it is now worth $500,000.

Scenario one: You gift the home or real property to your children and then pass away shortly thereafter. Your children receive a cost basis of $100,000, your original purchase price. They sell the house or real estate shortly after your passing for the current market value of $500,000. They will pay capital gains on the difference of $400,000. For most people the capital gains tax would be 15% so the children would owe $60,000 in capital gains tax.

Scenario two: You pass away leaving your home or real property to your children as an inheritance. The children get a step-up basis, meaning that the cost basis is the value when they inherit the property. Their cost basis in the property is the current market value of $500,000. They sell the house or real property shortly after your passing for $500,000 and will owe no capital gains tax. This is a $60,000 benefit to your children.

If you want to leave your home or real property to your children, there may be better ways to do it than making a gift. Contact the Law Office of Roy Neal Linnartz, PLLC at 830-625-9300 for help planning to leave property to your children without the unintended consequences of gifting it to them.