by Thomas D. Begley, Jr., CELA
Seventy percent of Americans will require some form of long-term care be it nursing home, assisted living or home care. The cost of this care can range from $20 per hour or more for home care to $10,000 – $12,000 per month for nursing home care. Before becoming eligible for Medicaid in a nursing home or assisted living facility, an individual must list their home for sale and if it does not sell during the individual’s lifetime, Medicaid will place a lien on the home on death. If the individual is receiving home care paid by Medicaid, then he or she will not have to sell the home at that time, but it will be subject to estate recovery on death.
The typical strategy to protect the home is to deed it to a child or children. The individual then waits five years and applies for Medicaid. One problem with this strategy is that there are risk factors. If the home is transferred to a child, the home could be lost, in whole or in part, if:
- The child has creditors who sue the child;
- The child winds up in a divorce; or
- The child is on public benefits and the transfer may cause the child to lose those benefits.
There are also significant tax disadvantages to transferring a primary residence to a child.
- Capital Gains Tax. If a parent gives the house to the child, the parent’s cost basis carries over to the child. If the parent paid $200,000 for a home many years ago and it is now worth $400,000, the $200,000 cost basis carries over to the child. If the child then sells the home, he or she must pay capital gains tax on the $200,000 profit.
- Section 121 Exclusion. If the parent sells the home, he or she has a $250,000 exclusion from capital gains tax, if single, and a $500,000 exclusion, if married.
- Step Up in Basis. If the parent dies and leaves the home to the child, the child receives a “step up” in basis, which means that the child’s basis is the fair market value of the home on the parent’s death. Let’s suppose the home is still worth $400,000 on the parent’s death. Now the child’s basis would step up to $400,000, and if the child sold the home right away, there would be no gain and no capital gains tax.
- State Real Estate Tax Benefits. In New Jersey there are a number of real estate tax benefits attendant to ownership of a primary residence. These include: Homestead Tax Rebate, Senior Citizen’s Deduction, Veteran’s Deduction, Veterans Exemption for Disabled Veterans, and a Tax Freeze. If the home is transferred to a child and the child does not occupy the home, then all of these benefits are lost. Even if the child does occupy the home, many of these benefits would be lost.
- A better solution would be to transfer the home to a trust for the benefit of the child. The primary residence exclusion, step up in basis, and state real estate tax benefits can all be preserved while eliminating the risk factors.