I often sit with clients in my Manhattan office who have a sensible-sounding idea. A couple, perhaps living in the same Brooklyn brownstone for 40 years, wants to make sure their daughter gets the house. They’ve heard about estate taxes and probate, and they want to avoid both. Their plan: sell the house to their daughter now for one dollar. It seems clean, simple, and private. Unfortunately, this is one of the most common and costly mistakes I see in my practice.
What seems like a straightforward sale is, in the eyes of the law, a transaction with serious tax and eligibility consequences. The impulse is a good one—to be a prudent steward of your family’s largest asset. But the execution often creates more problems than it solves.
When a “Sale” Is Really a Gift in Disguise
When you “sell” a property to a child for a price substantially below its fair market value, the IRS and New York State do not view it as a sale. They view it as a gift. The value of that gift is the difference between the fair market value and the price your child paid. If your home is worth $1.5 million and you sell it for $1, you have made a gift of $1,499,999.
This immediately brings the federal and state gift tax into play. While the federal gift and estate tax exemption is high (over $13 million per person in 2024), the New York State estate tax exemption is significantly lower. As of 2024, it stands at $6.94 million. Any gift you make during your lifetime that exceeds the annual exclusion amount chips away at this lifetime exemption.
More critically, New York has a “cliff.” If the value of your taxable estate is more than 105% of the exemption amount, you don’t just pay tax on the overage—you lose the exemption entirely and pay tax on the entire estate. A poorly planned gift of a home can easily push an estate over this cliff, triggering an unexpected and substantial tax bill.
The Capital Gains Tax Trap You Set for Your Child
Beyond the gift tax, this plan creates a significant problem for your child. By selling the house for a nominal fee, you hand them a massive future tax liability. The problem is the property’s “cost basis.”
When your child buys the property, their cost basis is what they paid for it—in our example, one dollar. When they eventually sell the house years later for $2 million, they will owe capital gains tax on the difference between the sale price and their basis. That’s a $1,999,999 taxable gain.
Contrast this with what happens if they inherit the house. Upon your passing, under current law, the asset receives a “step-up in basis.” This means the property’s cost basis is adjusted to its fair market value at the date of your death. If the house is worth $2 million when they inherit it and they sell it for $2 million, their taxable capital gains are zero. By trying to avoid estate tax, you could create a much larger income tax problem for the next generation.
The Five-Year Shadow: Medicaid and Long-Term Care
We must also consider the potential need for long-term care. Many families rely on Medicaid to cover the staggering costs of nursing home care, but to qualify, an individual must have limited assets.
To prevent people from simply giving away their assets to qualify, Medicaid has a five-year “look-back” period. Any assets transferred for less than fair market value within the five years before applying for Medicaid can result in a penalty period, during which the applicant is ineligible for benefits. That “sale” of your house for $1 is a disqualifying transfer.
If you were to need nursing home care within five years of “selling” the house, you would be forced to pay for it out of pocket until the penalty period expires. For many New York families, this can be financially devastating. It’s a stark reminder that estate planning isn’t just about what happens after you’re gone—it’s about protecting your own security during your lifetime.
A More Intentional Approach to Your Legacy
The desire to pass a family home to the next generation is a powerful one. It’s about legacy, not just real estate. But the strategy must be deliberate and informed. Tools like trusts—specifically an Irrevocable Medicaid Asset Protection Trust—can achieve the goal of transferring a home while protecting it from creditors, a principle reinforced under New York’s EPTL § 7-3.1. A properly structured trust can also preserve Medicaid eligibility after the look-back period and retain the valuable step-up in basis for your children.
Before you sign a deed or accept a dollar from a loved one, you must understand the full picture. The first step is to create a complete inventory of your assets and clarify your goals—for your own future and for your family’s. If you are considering how to manage your property as part of your legacy, schedule a consultation with our firm to review your assets and discuss a prudent path forward.
