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Should Mom Deed Me the House?

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There are many questions that come with inheriting a piece of real estate. Do you want to live in it? Do you want to sell it? Do you have to split the property with another heir?

Should Mom deed me the house? This is a frequently asked question at our office. It arises from the fear that a nursing home may take the house if the parent has to live in one.

The answer to this question is a definite maybe. Many different factors make the decision on this somewhat complicated. In this blog, we will explore two: First, what is the current health of the parent? Second, what are the income tax considerations?

In Maryland, there is a five-year look-back period on gifts when someone applies for Medicaid, which is the government program that pays for nursing home care for a poor person. That means if your parent applies for the government to pay for a nursing home, on the application you need to report any gifts made in five years. If the deed was done less than five years ago, it will create a penalty period during which the government won’t pay nursing home expenses.

When considering deeding the home, what are the changes that a nursing home will be needed within five years? For most folks asking me this question, five years more at home is not likely.  If the parent remains healthy for five years, then the penalty period is no longer an issue.

There are some limited exceptions to the five-year rule, such as a child quitting her (or his) job and moving in to care for a parent who requires nursing home level care for more than two years before the deed, transferring the home to a trust for a disabled child, or transferring a home to a co-owner sibling. You should consult an estate planning or elder law attorney if any of these scenarios sound familiar.

Second, what will the income taxes be when the home is later sold?  There is a significant income tax advantage for many families when they inherit real estate. When you buy a home for $20,000 and sell it for $500,000, you owe income tax on the gain in value. The $20,000 is called your “Basis” in the property, as it is your initial investment. The gain there would be $480,000, which in Maryland might mean combined Federal and State Income taxes of 23%, or about $110,000 in income taxes.

When you inherit the property, you receive a “Stepped-up basis,” meaning for tax purposes the basis is adjusted to the value of the property as if you purchased it on the date of death. For the most part, people don’t have to pay taxes on what they inherit, unless they live in a state with an inheritance tax. There are tax forms to be filed, says the Petoskey News-Review in the article “The pros and cons of inheriting real estate,” but not every estate has to pay taxes.

The estate has to pay taxes on any gains or losses after the death of the decedent, if and when they sell the property. The seller will have either capital gains or capital losses, depending upon what the house was purchased for and what it sold for. In the prior example, the basis would become $500,000, and no tax would be due on sale because the adjusted basis wipes out the gain.

If the house is deeded to a child who then needs to sell it within five years to pay for nursing home care, you have the worst combination. The child owes the income taxes on the sale, and the family has a penalty for the full value of the gift.

Some other things to consider before Mom deeds you the house: you may be the one with health problems, or a divorce, or a car accident, and the house could be lost due to one of those factors. Mom may not want to go to a nursing home. By and large, Maryland won’t pay for assisted living, which Mom would likely prefer to a nursing home.  What if Mom can’t handle the stairs anymore and needs to move?

Mom deeding the house to a child might be the best thing for families that are able to pass a house down to the next generation, and sometimes it works great. If considering this, it’s best to start the discussion early and make a plan.

An estate planning attorney can help the family work through the issues, including creating a plan for how the real estate property should be handled. The attorney will also be able to help the family plan for any taxes that might be due, so there are no big surprises.

Reference: Petoskey News-Review (June 25, 2019) “The pros and cons of inheriting real estate”