What Are the Drawbacks of Putting Your Home in Your Child’s Name?

Many parents consider transferring ownership of their home to their children, often to simplify the eventual inheritance process. This action involves legally changing the property’s deed to the child’s name while the parent is still living, making the child the new legal owner.

While the goal is to secure a family asset for the next generation, the strategy carries a number of unforeseen consequences. The implications of this transfer extend beyond simple ownership and can affect a family’s financial situation, control over the property, and tax liabilities.

Immediate Loss of Control and Ownership

The most direct consequence of deeding your home to a child is the complete and immediate loss of legal authority over the property. The child becomes the sole owner with the absolute right to sell, mortgage, or otherwise encumber the home without your consent. Any verbal understandings that you can live in the home for the rest of your life are generally not legally enforceable.

This loss of control can manifest in unexpected ways. For example, if you and your child have a falling out, they could legally initiate eviction proceedings. Even with a good relationship, the child may face personal circumstances, such as a job relocation, that lead them to sell the home, and you would have no legal standing to prevent the sale.

Without a formal document like a life estate deed, which reserves the parent’s right to live in the property, you are left in a vulnerable position. A life estate allows a parent to retain the right to occupy the home until their death, at which point full ownership automatically passes to the child.

Exposure to Child’s Financial and Legal Liabilities

Transferring ownership makes the home your child’s asset, exposing it to their financial and legal troubles. The property, which may have been protected from your own creditors, now becomes reachable by your child’s creditors. If your child has significant unpaid debts, creditors could place a lien on the house and potentially force a sale to satisfy the debt.

The property also becomes entangled in the child’s personal life, particularly in a divorce. If the child is married when they receive the title, the house could be considered a marital asset in a divorce proceeding. This means their divorcing spouse could have a legal claim to a portion of the home’s value, which may require selling the house to pay the settlement.

Furthermore, if the child were to file for bankruptcy, the home would be listed as one of their assets, and a court could order its sale to pay off debts. The risk is not just what the child might choose to do, but what external parties like courts and creditors can legally compel them to do.

Significant Tax Consequences

Deeding a home to a child introduces several complex tax issues for both the parent and the child. These consequences can be costly and often negate any perceived benefits of the transfer.

Gift Tax

When you transfer a home to your child for less than its fair market value, the IRS considers it a gift. For 2025, the annual gift tax exclusion allows you to give up to $19,000 to any individual without filing requirements. Since a home’s value will almost certainly exceed this amount, you will be required to file a federal gift tax return.

While you may not have to pay an out-of-pocket gift tax, the value of the gift that exceeds the annual exclusion is deducted from your lifetime gift and estate tax exemption. This exemption is the total amount you can give away during your life or at death without incurring tax, which is set at $13.99 million per individual.

Capital Gains Tax (Loss of Stepped-Up Basis)

A major tax drawback is the loss of the “stepped-up basis” for capital gains tax purposes. When a child inherits a home after a parent’s death, the child’s cost basis in the property is “stepped up” to the fair market value at the time of death. This means if they sell the house shortly after inheriting it, there will be little to no capital gain, and therefore, little to no tax.

If the home is gifted, the child receives the parent’s original cost basis—what the parent initially paid for the home, plus any capital improvements. When the child later sells the house, they will owe capital gains tax on the difference between the sale price and that low original cost basis. For example, if a parent bought a home for $50,000 and it is worth $450,000 when gifted, the child’s cost basis is $50,000. A sale at $450,000 creates a $400,000 capital gain. If inherited, the basis would be $450,000, resulting in no gain from the sale.

Loss of Property Tax Exemptions

Many local governments offer property tax reductions for specific homeowners, such as homestead exemptions for primary residences or tax freezes for senior citizens and veterans. These benefits are tied directly to the owner of the property who must also reside there. When a parent transfers ownership to a child who does not live in the home, the parent is no longer the owner and may lose eligibility for these tax breaks. This can result in a significant increase in the annual property tax bill.

Jeopardizing Eligibility for Medicaid

Transferring a home can have severe consequences for a parent’s future eligibility for Medicaid, particularly for covering long-term care costs. Medicaid is a needs-based program with strict asset limits, and to prevent applicants from giving away assets to qualify, federal rules impose a five-year “look-back” period. Any assets transferred for less than fair market value during this window are scrutinized.

Gifting a home to a child falls directly into this category and will trigger a penalty period. During this penalty period, the parent will be ineligible for Medicaid benefits, even if they are otherwise medically and financially qualified.

The length of the ineligibility period is calculated by dividing the home’s value by the average monthly cost of private nursing home care in their state. For instance, if a home was valued at $300,000 and the average monthly care cost is $10,000, the penalty period would be 30 months. The parent would have to pay for their own care for two and a half years before Medicaid would provide assistance.

Potential for Family Conflict and Other Complications

Beyond the legal and financial risks, deeding a home to a child can introduce significant interpersonal challenges. Giving a valuable asset like a home to one child can create feelings of resentment and unfairness among other siblings, leading to lasting family disharmony. The situation can be further complicated by the child’s spouse, who may feel they have a say in what happens to the property.

Another complication arises if the child or their own children plan to apply for need-based college financial aid. The Free Application for Federal Student Aid (FAFSA) requires reporting the assets of the student and their parents. The gifted home, now a significant asset in the child’s name, could substantially reduce or eliminate eligibility for grants and scholarships for the parent’s grandchildren.