James and Linda spent decades making their Houston house a home. They raised their children there, hosted family gatherings, and made countless memories within its walls. As they neared retirement, they wanted to pass their home to their children, believing it would be a meaningful way to secure their family’s future while avoiding probate.
But what seemed like a simple and generous decision quickly became more complicated. Their children faced unexpected tax issues, and when one child went through a divorce, the house became part of a messy legal battle. What they thought was a gift turned into a financial and emotional burden.
Many parents consider gifting their home as part of their estate plan, thinking it will ease the transition of assets and simplify matters for their loved ones. However, this well-intentioned move can come with unintended risks. From tax consequences to Medicaid eligibility issues and loss of control, gifting a house can create more problems than it solves.
If you are thinking about transferring your home to your children in Houston, it is important to understand the potential drawbacks. At Your Legacy Legal Care®, our compassionate Houston estate planning attorneys are here to break down some of the risks and explore alternative ways to pass on your property while protecting your interests.
Tax Consequences of Gifting Your Home
One of the biggest concerns when transferring your home to your children is the tax impact. Texas does not have a state gift tax, but federal tax laws still apply.
Gift Tax Implications
The IRS sets an annual exclusion limit for tax-free gifts. As of 2025, you can give up to $19,000 per recipient per year without triggering federal gift tax reporting requirements. However, if the home’s value exceeds this amount, you must file a gift tax return with the IRS. While most people do not owe gift taxes due to the lifetime exemption (currently $13.99 million per individual), large gifts reduce the exemption amount available for estate planning purposes.
Capital Gains Tax Issues for Your Children
If you gift your home to your children during your lifetime, they take on your original purchase price—known as the cost basis—for tax purposes. This can create a large capital gains tax bill if they later sell the home.
How Cost Basis Works
You bought your Houston home years ago for $100,000. That is your cost basis—the amount used to calculate profit (capital gains) when selling the home.
Over time, the home appreciates, and by the time you gift it to your children, it is worth $400,000.
If your children later sell it for $450,000, their taxable gain is the difference between the sale price and the original cost basis: $450,000 - $100,000 = $350,000 in taxable capital gains
Why Inheriting the Home Is Different
If your children inherit the home after your passing instead of receiving it as a gift, the tax situation changes. The IRS allows for a stepped-up basis, meaning your children’s cost basis would reset to the home’s fair market value at the time of your death.
If the home is worth $400,000 at the time of your passing, your children’s new cost basis becomes $400,000 instead of $100,000.
If they later sell it for $450,000, they would only owe capital gains tax on $50,000 instead of $350,000—a much lower tax burden.
This stepped-up basis can significantly reduce or even eliminate capital gains taxes, making inheritance a more tax-efficient way to transfer your home.
Medicaid Eligibility and Long-Term Care Planning
If you plan to apply for Medicaid to cover nursing home care in the future, gifting your home can create financial obstacles. Medicaid has a five-year lookback period, meaning any property transfers for less than fair market value within five years of applying could result in a penalty period where you are ineligible for benefits.
For example, if you gift your Houston home to your children and apply for Medicaid three years later, Medicaid may assume you gave away assets to qualify and impose a penalty, delaying your eligibility for long-term care assistance. This can leave you without coverage for nursing home expenses when you need it most.
Loss of Control Over Your Home
Once you transfer ownership of your home, you no longer have legal authority over the property. This means your children can make decisions about the home without your approval, including:
Selling the property
Using it as collateral for a loan
Renting it out to tenants
If your child faces financial trouble, creditors could place a lien on the home or force its sale to cover debts. Additionally, if your child goes through a divorce, the house may be considered marital property, depending on how it is titled and used.
Keeping ownership of your home provides financial security and control, allowing you to decide what happens to the property. If passing the home to your children is important, setting up a trust may be a safer option.
Alternative Options for Transferring Property
Instead of gifting your home outright, consider these alternative approaches:
Living Trust
A revocable living trust allows you to retain control over your home while ensuring it passes to your children upon your death. Unlike gifting, a trust avoids probate and provides flexibility if your circumstances change.
Life Estate Deed
A life estate deed allows you to stay in the home for the rest of your life while bypassing probate and transferring ownership to your children upon your passing. This approach protects your right to live in the home and may offer tax benefits similar to inheritance. It also bars creditors from putting a lien on the property.
Protecting Your Home and Your Legacy
While gifting your home to your children might seem like a generous decision, the financial and legal risks can create unintended complications. Instead of transferring ownership outright, consider options that allow you to maintain control while providing long-term benefits for your family. Consulting a Houston estate planning lawyer can help you explore the best strategy based on your unique circumstances.
Protect Your Home and Your Family’s Future with Your Legacy Legal Care®
From tax consequences to Medicaid eligibility concerns, the decision to gift your home to your children has long-term implications that deserve careful consideration.
At Your Legacy Legal Care®, we guide Houston families through estate planning strategies that protect their assets and preserve their legacy. Whether you are exploring trusts, life estate deeds, or other options, we provide tailored solutions to fit your needs.
Your online search for “estate planning law firms near me” brought you here. Take the next step and contact us today at (281) 218-0880 or complete our confidential online form to schedule your strategy session. Together, we will create an estate plan that keeps your home and your family’s future secure. We help families plan for the future, protect their loved ones, and guide them through the unexpected.
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The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.
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