Episode 98: Why You Shouldn’t Give Your Kids the House Yet
Episode 98
Host: Jill Mastroianni
Why You Shouldn’t Give Your Kids the House Yet
If you inherit a house, there’s one number you may not realize you need: what was the house worth on the date the owner died?
In this episode, Jill uses a fictional house from HBO’s Somebody Somewhere to explain what happens to tax basis when you inherit property, why getting a date-of-death appraisal can matter years after someone dies, and why receiving a house as an inheritance can have very different income-tax consequences from receiving that same house as a lifetime gift.
You’ll also hear why avoiding probate shouldn’t be the only consideration when deciding how to transfer property, and how solving one estate planning problem can sometimes create an entirely different tax problem.
What You’ll Learn in This Episode
The different ways you might inherit a house. A transfer-on-death deed, revocable trust, Will, or state intestacy law can all affect who ultimately receives real estate after someone dies.
What tax basis actually means. Jill breaks down tax basis using simple numbers and explains why it matters when you eventually sell an asset.
How the step-up in tax basis works. Inherited property generally receives a new tax basis based on its fair market value as of the owner's date of death, which can dramatically reduce the taxable gain when appreciated property is eventually sold.
Why you should consider getting a date-of-death appraisal. You may have no intention of selling an inherited house today, but you could need to establish its tax basis ten, fifteen, or twenty years from now. Documenting the value shortly after someone dies can be much easier than trying to reconstruct it years later.
What happens if you move into an inherited house. The principal-residence exclusion may allow a qualifying homeowner to exclude up to $250,000 of gain from federal income tax, or up to $500,000 in certain circumstances for married couples filing jointly.
Why your parents shouldn't necessarily put the house in your name now. Property received as a lifetime gift generally carries over the donor's existing tax basis for purposes of determining gain. If your parent bought a house decades ago for substantially less than it's worth today, that difference can matter enormously.
Why this isn't just about houses. The same basic tax-basis issue can arise with appreciated stock, family businesses, closely held companies, valuable collections, and other assets.
Why avoiding probate isn't the whole estate plan. Putting your name on Mom's house or having Dad give you appreciated stock might accomplish one goal while creating an income-tax consequence you hadn't considered.
Resources & Links
Episode 44 – The Hidden Tax Traps in Lifetime Gifts
Learn more about why giving appreciated property away during your lifetime can produce a very different tax result from leaving that property to someone at death.
https://www.deathreadiness.com/podcast/the-hidden-tax-traps-in-lifetime-gifts
Transfer-on-Death Deeds. Listen to Jill's earlier episode explaining how transfer-on-death deeds work and how they can allow real estate to pass at death without going through probate.
Revocable Trusts. Explore earlier episodes of The Death Readiness Podcast discussing revocable trusts, trust funding, and how trusts can be used to transfer assets outside of probate.
https://www.deathreadiness.com/podcast/episode-19-how-to-know-if-you-need-a-trust
Connect with Jill:
Website: DeathReadiness.com
Email: jill@deathreadiness.com
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If you inherit a house, there’s one number you may need years later: what was the house worth on the day the owner died? This week, I’m explaining tax basis, why a date-of-death appraisal matters, and why inheriting a house can have very different tax consequences than receiving that same house as a lifetime gift. A little planning and documentation now could make a significant difference when you eventually sell.
Welcome to The Death Readiness Podcast. This is not your dad’s estate planning podcast. I’m Jill Mastroianni — estate planning attorney, death readiness guide, and your translator for wills, trusts, probate, and the conversations most families avoid. If you’ve been wondering things like, ‘Can a trust protect what I leave to my children?’ ‘What happens if I give someone power of attorney over me?’ and ‘How can I help my parents while respecting their independence?’ You’re in the right place.
I missed two episodes of The Death Readiness Podcast. For the first time since I started releasing episodes in January of 2025, I was supposed to release a weekly episode, and I didn't. But I've had some personal challenges over the last few weeks, and I needed to step away from a few things temporarily.
While I’ve been gone, I discovered a series from 2024 called Somebody Somewhere that streams on HBO Max. It stars Bridget Everett as Sam, a woman in her late 40s who has moved back to her hometown of Manhattan, Kansas. When the show begins, Sam's sister Holly has been dead for about six months. Holly had cancer, and Sam moved back home to help care for her toward the end of her life.
I found the show incredibly soothing even though the show doesn't pretend the hard things aren't hard. And Sam’s grief over losing Holly doesn't disappear because enough episodes have passed. People are just trying to figure out how to keep going. And apparently, even when I'm watching a show because I'm trying to get a little escape from my own reality, I am still an estate planning attorney.
Because I started wondering about Holly's house. Throughout the show, Sam lives in this little one-bedroom house that belonged to Holly. Sam moved into the house while she was taking care of Holly, and after Holly died, she stayed.
And I found myself wondering: Who owns that house? Other people are watching this show and thinking about Sam's grief and her relationships and whether she is going to find her place in the world. I was thinking about that stuff, too, but I was also wondering who actually owns the house.
Now, stay with me because this gives us a really good way to talk about something that comes up a lot when someone dies. And that's inheriting a house. More specifically, I want to talk about a number you may not realize you're going to need someday: What was that house worth on the day the person who owned it died?
Because that number could eventually save you a lot of money. But before we get there, let’s think about how Sam could have ended up with Holly's house in the first place. The show does not tell us. At least not that I caught.
So we're going to do a little fictional estate administration. Holly lived in Kansas. Kansas allows something called a transfer-on-death deed. I've done an entire episode on transfer-on-death deeds, and I'll link to that episode in the show notes. But, essentially, a transfer-on-death deed allows you to name someone who will receive your real estate when you die without the property having to pass through probate. So maybe Holly signed a transfer-on-death deed naming Sam.
Another possibility is that maybe Holly had a revocable trust. Holly could have transferred ownership of the house to her revocable trust during her lifetime, and the trust could have said that Sam gets the house after Holly dies. I've talked a lot about revocable trusts on this podcast, including how they can be used to avoid probate. I'll link to one of those episodes in the show notes, too.
Or, maybe Holly had a Will that left the house to Sam. In that case, the house would have to go through probate, and eventually ownership could be transferred to Sam.
And then there’s another option. What if Holly didn't have an estate plan at all? When you die without a Will, that’s called dying intestate. And when you die intestate, state law decides who inherits the property that would otherwise be controlled by your Will. Holly wasn't married. She didn't have children. She had two sisters, Sam and Tricia. And both of Holly’s parents survived her. Under Kansas intestacy law, if someone dies without a surviving spouse or descendants but has a surviving parent or parents, the property passes to the surviving parent or parents.
Which means if Holly died without any estate planning, Sam would NOT have inherited Holly's house. Her parents would have. Maybe they eventually gave it to Sam. Maybe there was some other arrangement. Again, we don't know. But the fact that Sam lives there for all three seasons tells me something happened.
And now we get to the question I really want to talk about today. What was that house worth when Holly died? That sounds like a completely different question. But it's not. If Sam inherited Holly's house, the value of that house on Holly's date of death could become incredibly important years later.
To understand why, we need to talk about tax basis. And I'm going to make this as painless as possible. Your tax basis in an asset is, very generally, what you paid for it, adjusted for certain things that happen while you own it.
Let's say Holly bought her house for $100,000. That's our starting point. Then Holly spends $50,000 putting an addition on the house. That capital improvement increases her tax basis. So now, for our simplified example, Holly's tax basis is $150,000. Years go by. Holly's house is now worth $300,000. Then Holly dies. And Sam inherits it.
That's where something really important happens. Generally, when you inherit property from someone who has died, your tax basis in that property becomes its fair market value as of that person's date of death. You might have heard this called a “step-up in tax basis.”
So let's go back to our numbers. Holly bought the house for $100,000 and made $50,000 in improvements. Her tax basis was $150,000. But when Holly died, the house was worth $300,000. If Sam inherits the house, Sam’s tax basis is $300,000, the fair market value of the house on Holly’s date of death, not Holly's $150,000 tax basis. And that can make an enormous difference later.
Let's say Sam inherits the house when it's worth $300,000 and then sells it for $300,000. Because Sam inherited the house, her tax basis is adjusted to its fair market value on Holly's date of death. So, in our example, Sam's tax basis is $300,000. To figure out Sam's taxable gain, we subtract her $300,000 tax basis from the $300,000 sale price. $300,000 minus $300,000 is zero. So even though Holly may have bought the house years ago for much less, Sam doesn't have any taxable gain on the sale in our simplified example. That's the benefit of the step-up in tax basis.
But let's change the facts. Sam doesn't sell the house. She does exactly what she does in Somebody Somewhere. She lives there. Fifteen years go by, and eventually Sam decides she wants to sell it. Now the house is worth $550,000. What's Sam's tax basis?
This is where I hope Sam has a piece of paper sitting in a file somewhere that tells her what the house was worth when Holly died. Because fifteen years later, figuring out the value of a house on a particular date fifteen years ago may be considerably more difficult than figuring it out shortly after someone dies. That's why, when you inherit real estate, one of the first things you should do is look up a licensed appraiser to document exactly what the house is worth in the form of a qualified appraisal.
You might not be planning to sell. Maybe you move into the house. Or you rent it. And you keep it for twenty years. But someday, you, or the accountant preparing your tax return, will need to know your tax basis. Get the number through a qualified appraisal while the number is easy to establish.
Now, there's another tax rule we need to talk about if Sam actually makes Holly's house her home. If you sell your principal residence, you may be able to exclude up to $250,000 of gain from federal income tax, or up to $500,000 if you're married and filing jointly. If Sam has owned and lived in Holly's house throughout the three seasons of Somebody Somewhere and continues to do so, she may satisfy the requirements to qualify for the personal residence exclusion.
So, let's say Sam has an appraisal establishing that the house was worth $300,000 on Holly's date of death. That's Sam's tax basis. Years later, Sam sells the house for $550,000. We subtract her $300,000 basis from the $550,000 sale price, leaving Sam with $250,000 of gain. But remember, Sam didn't just inherit Holly's house. She moved in and made it her home. So, assuming Sam meets the requirements for the principal residence exclusion, she can exclude that entire $250,000 of gain from federal income tax.
Now let's change the hypothetical again. Because this is where the issue becomes much more practical. Let's say you inherit your dad's house. You already have a house so you’re not moving into your dad's house. Maybe you're going to sell it, or maybe rent it for a while and sell it later. That $250,000 principal-residence exclusion may never be available to you because this isn't your principal residence. Now that date-of-death appraisal becomes even more important.
Let's put some numbers to it. Your dad bought his house in 1985 for $80,000. When he dies, the house is worth $400,000. You get a date-of-death appraisal documenting that value. Your tax basis when you inherit the house is stepped up to $400,000. You hold onto the house for a while and eventually sell it for $450,000. When we calculate your gain, we're not starting with the $80,000 your dad paid for the house forty years ago. We're starting with your $400,000 tax basis. So, in our simplified example, you have $50,000 of gain—not $370,000. And that's why I care so much about getting that date-of-death value documented. You may not need that appraisal today. But years from now, when you sell the house, and pay the taxes, you’ll be very glad you have it.
And there's one more piece of this that I think is especially important for families doing estate planning. What if Dad doesn't leave you the house when he dies? What if he gives it to you while he's still alive? Maybe Dad says, "You're going to get the house eventually anyway. Let's just put it in your name now."
But there's also an income-tax consequence. Property you receive as a lifetime gift doesn’t get the same tax basis adjustment that inherited property gets at death. Instead, for purposes of determining gain, you receive the donor's adjusted basis. We call that carryover basis.
So let's go back to Dad. Dad bought the house for $80,000. It's now worth $400,000. For purposes of determining gain, you're taking Dad's $80,000 tax basis if he gives it to you during his lifetime. And if that tax basis is $80,000 and you eventually sell the house for $450,000, you have a very different income-tax picture.
This is something I talked about in Episode 44, "The Hidden Tax Traps in Lifetime Gifts." In that episode, I used a fictional vacation home to show why giving an appreciated asset away during your lifetime can produce a very different tax result from holding that asset until death. I’ll link to it in the show notes.
And this principle isn't limited to houses. Let's say your grandmother bought shares of General Electric in the 1950s. She has the original stock certificates tucked away somewhere. She paid almost nothing for those shares compared to what they're worth today.
If your grandmother gives you those appreciated shares during her lifetime, you take her very low tax basis for purposes of determining gain. If you inherit the shares from her at her death, your tax basis will be adjusted, or stepped up, to the fair market value as of her date of death.
The tax consequences are very different based simply on when the asset changes hands. And this is one of those places where I think estate planning gets reduced to the wrong question. People ask: “How do I get my name on Mom's house?” Or: “Should Dad just give me the stock now?” Or: “How do we avoid probate?” And those aren't bad questions. But they're incomplete questions.
You can solve a probate problem and accidentally create an income-tax problem. That's why I don't want you moving assets around simply because somebody told you it's easier if your name is already on them. Before you make a lifetime gift of a highly appreciated asset, understand what happens to the tax basis.
And after someone dies, if you inherit an asset whose value matters for tax basis purposes, think about how you're going to document its fair market value as of the date of death when you sell it. For real estate, that may mean getting a qualified appraisal. For publicly traded stock, establishing the date-of-death value is much easier. For a family business, closely held company, valuable collection, or other unusual asset, valuation can become much more complicated but possibly even more important.
The principle is the same. Don't wait fifteen years and assume Future You will somehow reconstruct all of this. Future You has enough problems. Give Future You the appraisal.
And, also, give Future You, and current you, some grace. Sometimes there isn't a clean transition from a difficult period back into normal life. Sometimes you just do the next thing. For me, apparently, the next thing was watching Somebody Somewhere, wondering who owned a fictional house in Manhattan, Kansas, and then thinking about its tax basis.
Thanks so much for listening today.
This is Death Readiness, real, messy and yours to own. I’m Jill Mastroianni and I’m here to help you sort through it, especially when you don’t know where to start.
Hi, I'm April, Jill's daughter. Thanks for listening to The Death Readiness Podcast. While my mom is an attorney, she’s not your attorney. The Death Readiness Podcast is for educational and entertainment purposes only. It does not provide legal advice. For legal guidance tailored to your unique situation, consult with a licensed attorney in your state. To learn more about the services my mom offers, visit DeathReadiness.com.
