A couple in Manhattan owns the brownstone they bought in the 1980s. They believe signing the deed over to their adult children is a clever way to bypass estate taxes. They see it as a simple act of generosity. In my experience, this is one of the most common—and costly—misconceptions in estate planning. The logic seems sound, but the financial and legal reality for New York families is not so simple.
An outright gift of your home is a permanent solution to what is often a temporary or even non-existent problem. It can trigger consequences far worse than the tax you were trying to avoid.
The Difference Between a Gift and an Inheritance
New York does not have an “inheritance tax,” which is paid by the person receiving property. Instead, New York has an estate tax, paid by the estate of the person who has passed away. As of 2024, the New York State estate tax exemption is $6.94 million per person. If your estate is below that threshold, there is no state estate tax to pay.
Many families who gift their homes are trying to solve a tax issue they do not have. In doing so, they create a real tax problem for their children—the capital gains tax.
When your children inherit property, its cost basis is “stepped up” to its fair market value on the date of your death. If you bought that brownstone for $400,000 and it’s worth $4 million when you pass away, your children inherit it with a new $4 million basis. If they sell it immediately for that price, their capital gains tax is zero.
If, instead, you gift the house to your children during your lifetime, they receive your original cost basis of $400,000. If they later sell the house for $4 million, they have a $3.6 million capital gain to report. This is a classic case of avoiding a potential estate tax only to guarantee a significant income tax.
Stewardship Means Retaining Control
Beyond the tax implications, gifting your home means giving up control. Completely. The moment you sign that deed, the house is no longer yours. It belongs to your children, and by extension, it is exposed to their financial lives and liabilities.
This means the house could be at risk if your child:
- Goes through a divorce—the home may be considered marital property.
- Faces a lawsuit from a car accident or business dispute.
- Declares bankruptcy.
- Has federal or state tax liens filed against them.
You may trust your children implicitly, but you cannot control their future. What was intended as a gift to secure their future can become a liability that jeopardizes your own. If you continue to live in the home after gifting it, the IRS may still consider it part of your taxable estate, defeating the purpose of the transfer.
A More Deliberate Path: Using Trusts
Transferring a home is not a casual transaction. In New York, the law treats real estate transfers with gravity. A sale, for instance, requires adherence to statutes like Real Property Law § 240-c, which mandates a specific property condition disclosure statement. A gift, while different, is an equally formal conveyance of property.
A more prudent approach to managing a home involves using a trust. A properly structured trust allows you to set the terms for how the property is managed and eventually distributed. It provides a framework for stewardship that an outright gift lacks.
For example, placing the home in an irrevocable trust can remove it from your taxable estate while offering a layer of asset protection. You can appoint a trustee—even a child—who has a fiduciary duty to manage the property according to the rules you established. This is a more intentional and deliberate act than simply signing over a deed and hoping for the best.
It allows for contingency planning. It protects the asset from unforeseen risks in your children’s lives. And in many cases, it can achieve tax objectives without the devastating capital gains consequences of an outright gift.
Before you transfer title to your property, your first step is to establish the facts. Gather the original purchase documents to find the cost basis, get a current appraisal for its fair market value, and prepare a simple net worth statement to see where you stand against the New York estate tax exemption. With these three data points, you can have a productive conversation about the right way to plan for your family’s legacy.
