Home Title Change: A Completed Gift?

Posted by Lee Reams Sr. on

Background: A frequently encountered issue is when an elderly parent turns the title of his or her home over to a child or other beneficiary and continues to reside in the home. This situation raises important questions: How is a future sale of the home treated if it is sold before the parent’s death (will Sec 121 apply?), and is a gift tax return required? Or if the parent passes away while still residing in the home, does the beneficiary use a gift basis or the FMV on the date of death? What is the tax result if the parent moves out of the home?

Completed Gift or Life Estate? – Per Sec 2036, the value of a decedent’s estate shall include the value of all property in which the decedent has transferred any interest (except for a bona fide sale) that the decedent has retained for his or her life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death. Thus, an individual who transfers a title and retains the right to live in a home for his or her lifetime has established a de facto life estate, and as such, when the individual dies, the value of the home is included in the decedent’s estate and no gift tax return is applicable. As a result, the beneficiary’s basis would be the FMV at the date of the decedent’s death.

Even though a de facto life estate may be intended, without written documentation the giver takes the risk of having the home sold out from under him by the new titleholder.

On the other hand, if the elderly parent does not continue to reside in the home after transferring the title, a gift has occurred since no life estate has been established; a gift tax return would be required, and the child’s (gift recipient’s) basis would be the parent’s adjusted basis in the home at the date of the gift. In addition, if the child were to sell the home, the Sec 121 home sale exclusion would not apply unless the child met the Section 121 qualifications.

Partial Interests - Section 121 applies to sales of partial interests, so if the parent has simply added the child’s name to the title, retaining a partial interest, and the home is subsequently sold, the parent would be able to apply the Sec 121 exclusion to his or her portion of the gain provided he or she met the Sec 121 qualifications. A gift tax return would be required for the year the child’s name was included on the title, and the child’s basis would be the portion of the parent’s adjusted basis transferred to the child. The Sec 121 exclusion would not apply to the child unless the child separately met the Sec 121 qualifications.

Although “parent” and “child” were used throughout this analysis, the same rules would apply to unrelated individuals.