This question is asked frequently by older persons concerned that their home might be lost in the event illness requires nursing home placement or when concerns are raised about inheritance taxes. Deciding the best course of action requires some careful consideration and decisiveness on the part of the homeowner.

Initial determinations - To begin consideration of this question, a determination must be made of the present value of the home. Many people can make an educated guess of the value of their home based upon the selling price of similar homes in the neighborhood. If this determination is not easy to make, a appraisal can be done or, you may use the new Erie County Assessment figures for valuation purposes, provided you multiply the assessed value by the Common Level Ratio. The Common Level Ratio is currently 1.13.  If the assessed value of your home is $100,000, you must multiply that value by 1.20 to determine its value, and in this example the value would be $120,000.  The Common Level Ratio changes each year on July 1. The current figure can be used for these calculations until June 30, 2008.

Once this calculation is made, the basis of the property must be determined. The basis of any property is the price paid for it, increased by the cost of any permanent improvements made during your period of ownership. If you acquired the property by gift, your basis is the same as the donor’s basis, increased by the permanent improvements made after your acquisition of title. If you inherited the property, the basis is the value of the property used for purposes of estate settlement, increased by the cost of any permanent improvements made after you inherited the property.

Three choices - Once you have determined the basis and the present value of the residence, you need to understand that there are only three (3) things you can do with the residence at this point: keep it, sell it or give it away. So you need to consider the pro’s and con’s of each of these potential actions in order to decide what to do.

1. The owner retains his or her place of residence and does not have to face the possibility of moving to a new or unfamiliar environment.

2. Although there will be some inheritance tax upon the death of the present owner, the amount of the inheritance tax is usually much less than the income tax to be paid by the person to whom the house is given when he or she sells it.

1. Upon the death of the owner (or the last to die of a married couple) there will be an inheritance tax on the property. To make a rough determination of the amount of tax which will be due, multiply the present value by 4.5% if the heirs of the house are the children or grandchildren of the owner. Multiply by 12% if the heirs will be siblings and 15% if they are friends. There is no inheritance tax if the property is to be inherited by a church or charitable organization.

2. If the owner if the house becomes unable to take care of himself and requires nursing home placement, there is no lien placed against the property and the state does not take it or require it to be sold. However, unless there is nursing home insurance or significant other income or assets which will cover the cost of nursing home placement (currently about $6757.67 per month), the likelihood is that, at some point, the owner will expend all available resources and require public assistance. Should that occur, the state will cover the costs of care, but upon death, the state will place a claim against the estate of the decedent for the amount so expended. This may require the sale of the residence to cover the cost of the care. The claim applies only to assets in the estate; if the house is jointly owned with another living person, the state cannot collect on the claim.

1. The federal income tax laws allow the exclusion of the first $250,000 of the gain on the sale of a principal residence. ($500,000 for a married couple.) The corresponding Pennsylvania Income tax exclusion is $100,000 for taxpayers who are over 55 on the date of sale, but if the property was purchased before the date on which the tax law became effective (June 1, 1971), a portion of the gain can also be excluded on the basis that it occurred before that date. With these exclusions, many people can exclude all of the gain on sale from income tax.

2. The proceeds of the sale can usually be given to the intended heirs without the payment of any federal gift tax, thereby transferring the accumulated wealth of the family from one generation to the next and keeping the government out of the picture. However, you should be aware that if medical assistance is applied for by the donor of this money, the applicant must report any gifts and the amounts given within the five years preceding the application. Present regulations require the value of the gift to be divided by $6062.35 to determine the number of months from the date the person would otherwise qualify for Medicaid benefits that the person who made the gift is ineligible for those benefits.  This can create a serious problem, because the donor will not be eligible for benefits when he or she runs out of money, unless the transfer took place more than 5 years previous to the eligiblity.

1. The most obvious con in this case is that the older person has to live somewhere and may need to use the proceeds of the sale of the house to meet the expenses of rental of suitable accommodations. However in many cases, periodic income from Social Security and pensions is sufficient to meet these day-to-day needs.

Pro’s

1. Giving the property to the intended heir(s) allows for an immediate transfer of the property and the responsibilities that go along with it. The donee becomes liable for maintenance, taxes and insurance.

2. There will be no inheritance tax on the property provided the donor lives for a period of one (1) year after the date of the transfer.

1. Such a gift will result in a period of ineligibility if the donor would otherwise qualify for Medicaid benefits within five (5) years of the date of the transfer.

2. Giving the house away and reserving the right to live there for the rest of your life will result in the imposition of inheritance tax on the full value of the property at the date of death.  However, the property will receive a "step up" in basis to the value as of the date of death and, if you reserve the right to sell the property as well, you may be able to have the best of both worlds - retaining your property and the right to use it without including it as a probate asset in your estate.

3. If the person to whom the house is given dies, or is involved in a divorce, lawsuit or accident there is some danger that the property will be taken to settle up on these matters, leaving the donor out in the cold. There seems to be a feeling that "That won’t happen in my family" but no family is immune from these sorts of problems.

4. After the death of the donor or after the donor has moved out of the house, the person to whom it is given usually sells the property. Even when the donee intends to reside in the property himself, the fact of the matter is that the house is usually sold. If the donee does not own and live in the house as his principal residence for a period of two out of the last five years before sale, there will likely be a tax on the long term capital gain, which is the difference between the basis (calculated as set forth above) and the selling price.

In many cases the resulting tax is more than the inheritance tax on the fair market value of the property.

One variation on the above that often is discussed is the possibility of putting the property into joint name with one or more parties. This can, of course, be done and when it is the above considerations all apply to the various fractional shares. For example, if a father puts his house into joint name with his son, and later dies, still owning the remaining one-half, there will be inheritance tax on one-half the value at the date of death and the son’s basis in the property is 1/2 his father’s basis plus 1/2 the value at the date of death. The gift of the 1/2 will likely require the filing of a gift tax return and will give rise to the "look-back" rules discussed above if the father applies for medical assistance. 

These are by no means the only considerations to be applied in the determination of whether to transfer the house. Other factors which must play into the determination are the health of the parties, the level of cooperation of the family members and the mental state of the older family member who is contemplating the transfer. There are no easy answers and there is no one right answer to the question. This brochure only touches the tip of the iceberg and covers the matter in a general, non-specific manner. Specific questions and situations may lead to different conclusions. In order to come to the decision which is correct for you, a consultation with one of the attorneys at Steadman Law Office will be helpful.