Why selling a home to your child for a dollar can backfire

Many aging parents look for ways to pass their home to an adult child while avoiding probate or protecting assets in case they need long-term care. One idea that surfaces frequently is selling the home for a dollar or gifting it outright.

But according to elder law attorney Harry Margolis, this strategy can create major financial and tax consequences for both parents and children.

“We usually say no,” Margolis said, noting that giving a home to a child exposes the property to risks if the child faces financial trouble, divorce, illness, or dies without an estate plan.

In an interview discussing common questions from his Ask Harry column, Margolis explained why gifting a home rarely delivers the benefits families expect and why waiting until death often produces better outcomes.

Below is a transcript of the interview, edited for clarity and brevity.

Robert Powell: Many elderly parents want to know whether they can sell their home to a child for, say, a dollar. Here to talk with us about that is Harry Margolis, author of "Get Your Ducks in a Row." Harry, welcome.

Harry Margolis: Good to see you, Bob.

Should parents sell a home to their child for a dollar?

Robert Powell: This is a question you get all the time. How do you answer it?

Harry Margolis: We usually say no for a few reasons. There are risks. If you give your house to your kids, the property becomes vulnerable to claims if they run into financial trouble, get divorced, or pass away without an estate plan. It also becomes exposed if they get sick and need to qualify for certain benefits. So gifting creates potential risks.

But some people still decide to do it. They want to put a child’s name on the property to avoid probate or for Medicaid planning purposes so the home is not subject to Medicaid estate recovery. There are arguments on both sides, and it depends on the situation.

The capital gains issue

Harry Margolis: One major tax issue often convinces people not to gift or sell the home for a nominal amount. It involves capital gains.

If you sell property, you pay tax on the capital gain, which is the difference between the basis and the selling price. The basis is what you paid for the house. If you bought a home for $200,000 and later invested $100,000 in a kitchen renovation, your basis becomes $300,000.

If you sell that home for $700,000, the gain is $400,000. Most people selling their own home can exclude some or all of that gain — up to $250,000 for a single owner or $500,000 for a married couple. So in that example, there would be no capital gains tax.

But that changes if you give the house to your daughter, for example, and she sells it as a non-owner occupant. She would face the full $400,000 of gain. Between federal and state taxes, the cost might be about 20 percent, or roughly $80,000.

We explain to kids that they face a definite tax hit. Meanwhile, the long-term care risk their parents are trying to protect against is not certain. One thing is certain, but the other is not.

Why step-up in basis matters

Harry Margolis: The key is the step-up in basis. When parents gift the home, the child receives it with the same basis the parents had. But if the child inherits it, the basis adjusts to the fair market value on the date of death.

If a parent dies when the house is worth $800,000, the child’s basis becomes $800,000. If the child sells it immediately for the same amount, there is no capital gains tax. Waiting until death creates significant tax savings.

Does selling for a dollar lower the basis?

Robert Powell: In the Ask Harry column, someone asked whether selling a house for a dollar means the basis becomes a dollar. Does it?

Harry Margolis: No. The dollar is just nominal consideration. Deeds have to list an amount, so people often use a dollar. But it is still treated as a gift and does not reduce the basis to a dollar.

Alternatives: life estates, trusts, and "lady bird" deeds

Robert Powell: There was also a term — "ladybird deed." Do people need to know what that is?

Harry Margolis: Yes. There are ways to get some protection and still preserve the step-up in basis. Trusts can avoid probate and, if irrevocable, may provide Medicaid protections.

A life estate is another option. Parents transfer the home to the child but retain the right to live there for the rest of their lives. It gives them protections and still preserves the step-up.

A ladybird deed is a form of enhanced life estate permitted in many states. Not in my state, Massachusetts, but in others. It works like a transfer-on-death deed.

Parents retain even more power — they can sell or mortgage the property without the child’s consent. That is not possible with a traditional life estate, because the child holds an actual property interest.

Bottom line

Robert Powell: So bottom line: if you are an older parent and want your child someday to own the home, do not sell it for a dollar and do not gift it. It is better to take advantage of the step-up in basis.

Harry Margolis: Right. And think about the alternatives, whether that is a life estate, a ladybird deed, or a trust.