When a family in Brooklyn loses a parent who owned a brownstone purchased in 1982 for $90,000, the immediate fear is almost always the tax bill. The children look at the current $2.8 million valuation and assume the government is about to seize a massive percentage of their inheritance. Families frequently sit across from my desk asking how to avoid the “inheritance tax” on the family home. I tell them they are worried about the wrong tax. The real threat to generational wealth is rarely an inheritance tax—it is the capital gains tax, and the damage is often done years before the parent passes away.
The Difference Between Estate, Inheritance, and Capital Gains Taxes
We first must clarify how property is taxed upon death. New York does not impose an inheritance tax. An inheritance tax is a levy paid directly by the person receiving the asset, and only a handful of states still enforce one. New York assesses an estate tax against the total value of the deceased person’s assets before anything is distributed to the heirs.
However, the state estate tax threshold is high—$6.94 million for deaths in 2024. Unless your parent’s total assets exceed that number, the estate tax simply will not apply.
The actual danger is the capital gains tax. If your parent bought a house decades ago, it has appreciated significantly. If they leave the house to you through a proper estate plan, the federal tax code grants a “step-up in basis.” The IRS treats your purchase price not as the $90,000 your parent originally paid, but as the $2.8 million the property is worth on the day they die. Sell the home shortly after their passing for $2.8 million, and you owe zero capital gains tax. You capture decades of property appreciation completely tax-free.
The Danger of the Quitclaim Deed
This is where families make catastrophic mistakes. Well-meaning parents hear horror stories about probate. They know that dying with real estate in their individual name locks the property. The family cannot sell it, refinance it, or legally clear out tenants until an executor is formally appointed. The next nine months to a year belong to Surrogate’s Court.
To avoid this, parents often try to bypass the legal system by adding their children to the deed while they are still alive. This is a disaster.
When you are added to a deed during your parent’s lifetime, you do not get a step-up in basis. You receive a “carryover basis”—you inherit their original purchase price. When you eventually sell that property after they are gone, you pay capital gains tax on the entire margin of appreciation. A simple deed transfer meant to save a few thousand dollars in probate costs routinely triggers hundreds of thousands of dollars in unnecessary taxes.
Strategic Trust Planning for Real Estate
The prudent way to protect a family home is through deliberate trust planning. By re-titling the home into a properly structured trust, we achieve multiple objectives simultaneously—keeping the property out of Surrogate’s Court, protecting it from creditors, and preserving that crucial step-up in basis.
If the goal is to protect the house from potential long-term care costs or Medicaid recovery, an irrevocable Medicaid Asset Protection Trust is often the appropriate vehicle. The parent retains the right to live in the home for the rest of their life, but legally, the trust acts as the custodian of the property. If the parent requires nursing home care, the state looks back at all financial transfers made over the previous five years. A house transferred to a child outright is a penalized gift. A house transferred to an irrevocable trust is protected, provided the five-year clock has run.
We must also be intentional about what happens if the estate is large enough to trigger the New York estate tax cliff. Under EPTL § 2-1.8, unless a will or trust explicitly directs otherwise, estate taxes are apportioned among the beneficiaries according to the value of their inherited share. Imagine a parent leaves a highly valuable piece of real estate to one child and an equivalent value of liquid cash to another. If the tax clause in the estate plan is poorly drafted—or entirely absent—the child who inherits the house might be forced to sell the property just to pay their apportioned share of the tax liability. A deliberate estate plan anticipates this contingency. It specifies exactly which assets will be used to satisfy tax obligations so the family home remains untouched.
Why Piecemeal Gifting is Rarely the Answer
I occasionally see financial articles suggesting parents use their annual gift tax exclusion to gradually transfer fractional ownership of a house to their children year by year. While legally permissible, this is a logistical nightmare and generally poor stewardship of a primary residence.
Every time you transfer a fractional share, you file new deeds and gift tax returns. More importantly, you expose the family home to the children’s liabilities. If a child goes through a bitter divorce, declares bankruptcy, or is subject to a judgment, their fractional share of the parent’s house becomes a target for creditors. You risk the roof over your parent’s head to save a theoretical tax burden.
Stewardship. A trust allows the parent to maintain control of the asset while shielding it from both taxes and external liabilities. The house remains a protected unit, passing to the next generation exactly as intended.
Securing a family home requires more than downloading a blank deed form. It requires a clear-eyed assessment of the property’s value, the family’s tax exposure, and the long-term goals for the asset. If you are concerned about how your parent’s property is currently structured, schedule a deed and title review with our office to ensure the right legal protections are actually in place.
