Putting Your House in Your Kids' Names: The Hidden Tax

Margaret bought her house in 1985 for $80,000. It's worth about $400,000 now, and her plan is to put it in her son David's name so he never has to deal with it. If David ever sells, that plan could cost him about $56,000 in federal tax. Leave him the same house instead, and that tax could be zero. We draw the whole thing out: the price tag every house carries, the bill, the tax people worry about for nothing, what happens when you just add a name to the deed, and the roads that leave a house without handing over the old tag. ENTRIES 0:00 Margaret's plan 0:33 The price tag 1:19 The bill 3:13 The wrong worry 4:16 Just add a name 5:40 Leaving it ──────────────── THE LINES THAT MATTER · 2026 rules Line 1 · Gift: a house given during life keeps the giver's basis, what she paid (plus improvements). IRC §1015. Line 2 · Inheritance: a house left at death gets a new basis, its value on the day of death. IRC §1014. Line 3 · The home-sale break ($250,000, or $500,000 for a married couple) needs two of the last five years as your home. A child who never lived there doesn't get it. IRC §121. Line 4 · Net investment income tax: 3.8% on the part of your income over $200,000 single ($250,000 joint). IRC §1411. Line 5 · Gift tax: up to $19,000 a year to anyone with no paperwork in 2026. More, and you file Form 709; no tax is due until lifetime gifts pass $15 million. Line 6 · Adding a child to the deed is a gift of half the house, with your price tag on it. Line 7 · A will, a revocable living trust or a transfer-on-death deed (in more than 30 states plus D.C.) passes the house with a rewritten tag. In the nine community property states, a married couple can get a new tag on the whole house at the first death. Line 8 · Give a house to a dying parent and get it back within a year, and the tag isn't rewritten. IRC §1014(e). ──────────────── WORKED EXAMPLE · our calculation, federal tax, 2026 rules Margaret bought in 1985 for $80,000; the house sells for $400,000. David is single and earns $100,000 a year. Gift road: gain $320,000; 15% = $48,000; plus 3.8% on the $220,000 over the $200,000 line = $8,360. Federal tax: $56,360. With no other income: about $42,700. Inheritance road: new tag $400,000; gain $0; federal tax $0. Third road, Margaret sells it herself while she lives there (her other income $30,000): her $250,000 break covers most of the gain; about $7,500. State tax is extra and depends on the state. ──────────────── FILED UNDER § 26 U.S.C. §§1(h), 121, 1014, 1015, 1411, 2010(c)(3), 6321; 26 CFR 1.121-1, 25.2511-1(h)(5) § IRS: Rev. Proc. 2025-32; Publications 523, 551, 555; Instructions for Form 709; Frequently asked questions on gift taxes § 12 U.S.C. §1701j-3(d) (due-on-sale exemption); 11 U.S.C. §363(h); 42 U.S.C. §1396p(c); CMS, Deficit Reduction Act fact sheet § California State Board of Equalization, Publication 800-1 (Proposition 19) § Congressional Research Service R48183 (estate and gift taxes); Joint Committee on Taxation JCX-45-25 (tax expenditures) § U.S. Census Bureau, Housing Vacancies and Homeownership ──────────────── NOT TAX ADVICE · General information from public sources, not personal tax, legal or financial advice. State rules differ and change. Which road fits depends on your state and your details: ask a lawyer there. Not affiliated with the IRS or any government agency. Researched, written and drawn for The Tax Ledger.