When you and your elderly parents plan to distribute their assets, their home is likely one of the most valuable. However, transferring ownership can be complicated.
While it might seem like a straightforward way to simplify estate planning or qualify for Medicaid, there are serious tax consequences and eligibility rules to consider — not to mention long-term implications for both generations.
This article walks through everything you need to think about before your parents sign over their home, from capital gains taxes to Medicaid’s five-year look-back period.
Tax Implications of Transferring a House
Q: What tax consequences should we consider before transferring the house?
A: A home transfer could result in a significant capital gains tax liability, especially if your parents have owned their home for a long time and its value has increased. The key difference lies in how you receive the house.
Q: How does tax liability differ if I inherit the house versus receive it as a gift?
A: If your parents sign over ownership while still alive — through a gift deed or similar — you're liable for the difference between their original purchase price and the eventual selling price. But if you inherit the house through a will or trust, your tax responsibility is based only on the difference between the value at the time of inheritance and the selling price.
That difference can be massive. For example, if your parents bought the house for $100,000 and it’s now worth $400,000, transferring it while they’re alive could set you up for $300,000 in taxable gains if you later sell. If you inherit it instead, and it’s still worth $400,000 at the time, you’d owe taxes only on gains above $400,000.
Q: Can my parents simply give me their house?
A: Yes — they can transfer it using a gift deed without any payment in return. However, doing so may trigger federal gift tax filing requirements (and in rare cases, actual gift taxes) if the home's value exceeds annual and lifetime thresholds. You may also be responsible for capital gains tax down the line.
Q: What if my name is just added to the deed?
A: Adding your name to the deed makes you a co-owner, but it can still have serious tax and Medicaid implications. It may be treated as a partial gift, and it doesn’t shield the property from capital gains or eliminate probate risks for your parents’ share.
To avoid assuming a major tax burden, thoroughly assess how much the home has appreciated — and consult a tax professional before making any decisions.
A Home Transfer's Effect on Medicaid Eligibility
Q: Could signing over the home help my parents qualify for Medicaid?
A: It might seem that way, but in many cases, it does the opposite.
Medicaid determines eligibility by assessing an applicant’s assets — and since a house is often their largest asset, families sometimes assume transferring it will help. However, the Medicaid system includes a five-year look-back period for financial transactions.
If your parents transfer their home within five years of applying, Medicaid may treat the transfer as if they still owned the asset, resulting in a delay in benefits.
Q: What does that delay look like in practice?
A: Let’s say the home is valued at $300,000 and your parents require $5,000 a month in care. The transfer would trigger a 60-month penalty (300,000 ÷ 5,000), meaning Medicaid wouldn’t cover their expenses for five years — during which they’d be responsible for paying privately.
Q: Are there exceptions to the home being counted as an asset?
A: Yes. If a dependent — such as a spouse, child under 21, or disabled child — still lives in the house, Medicaid may exclude it from the asset calculation. This exemption may also apply if you live in the home and have provided care to your parent(s) for at least two years before they enter a care facility, allowing them to stay home longer.
Q: What about using a trust instead of a direct transfer?
A: Transferring the house into a trust may help in some circumstances, but it still falls under the five-year look-back period.
If your parents are likely to apply for Medicaid in the near future, a trust transfer may not avoid the eligibility delay. This option works best if planned well in advance — ideally five years before Medicaid is needed.
Is Avoiding Probate a Good Reason to Transfer the House?
Q: Can signing over the house help us avoid probate court?
A: Yes, but that doesn’t mean it’s the best path. Probate is the legal process of distributing a person’s assets after death. Some families try to avoid it by transferring assets early, but that can backfire with tax and Medicaid consequences.
Q: Is probate always bad?
A: No. While some states have complex and expensive probate procedures, others keep the process relatively simple. It’s worth researching your own state’s rules before making decisions based on avoiding probate alone.
Q: What’s a better way to avoid probate without giving up ownership now?
A: Establishing a revocable living trust is often a smarter choice. If your parents place the home in a trust and name you as a beneficiary, the property can pass to you directly without going through probate — and without creating tax liability during their lifetime.
This approach keeps the home in their control but avoids court involvement when the time comes.
What Happens if the Adult Child Dies First?
Q: Could transferring the house to me create problems if I die before my parents?
A: Yes. Once the house is in your name, it becomes part of your estate. If you pass away before your parents — and especially if you haven’t made an estate plan — the house may go through your probate and be distributed according to your state’s intestacy laws, which might not reflect your parents' wishes.
This situation underscores the importance of long-term planning. A trust, or at least a clear will on your end, can help ensure the property ends up where everyone intends.
Common Ways to Transfer Ownership
Q: What options are available if we decide to transfer the house?
A: If you and your parents determine that transferring the home is the right move, there are three common legal methods:
Quitclaim deed: This is the simplest way to transfer ownership. Your parents sign over any interest they have in the house to you, and the deed is filed with the county. It transfers title but makes no guarantees about liens, debts, or title defects.
Pros: Simple and quick.
Cons: Offers no protection for the new owner. Your parents are still responsible for any mortgage.
Gift deed: A gift deed explicitly frames the house transfer as a gift, with no money exchanged. Both parties sign, and the transaction is recorded.
Pros: Easy to execute.
Cons: The recipient may owe gift taxes if the value exceeds federal thresholds. Also, capital gains taxes apply if the house has appreciated.
Transfer on death deed: Also called a beneficiary deed, this approach keeps the house in your parents’ name while naming you as the beneficiary. You automatically receive ownership when they pass, bypassing probate.
Pros: Avoids probate and doesn't affect Medicaid eligibility while your parents are alive.
Cons: Not available in every state and must be executed carefully.
Q: Can Trustworthy help us with managing these documents?
A: Yes. Platforms like Trustworthy help families organize and store critical documents, such as deeds, wills, POAs, and trust paperwork. You can assign access to family members or advisors and even collaborate with a Trustworthy Certified Expert™ on estate planning. That means less risk of losing paperwork — and more peace of mind.
Alternatives to Transferring Ownership
Q: What can we do instead of transferring the house?
A: If your parents want help managing their home but don’t want to trigger tax or Medicaid consequences, there are two strong alternatives:
Trust: A revocable living trust allows your parents to retain control of the home during their lives, while specifying who will receive it afterward.
Pros: Avoids probate and offers more control than a will.
Cons: Still subject to the five-year Medicaid look-back rule if they apply for coverage.
Power of attorney: A durable power of attorney, or POA, lets you manage your parents’ finances — including their home — without transferring ownership.
Pros: You can pay bills, handle maintenance, or even arrange a sale on their behalf. It doesn’t trigger taxes or affect Medicaid eligibility.
Cons: Comes with fiduciary responsibilities and only works while your parents are alive.
Q: Can a power of attorney be used to sell a house?
A: Yes — if properly written, a POA can give you authority to sell your parents’ home while they’re still alive and unable to manage it themselves. However, the decision to sell must be in their best interest and consistent with your fiduciary duties.
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