A client came to my office last month with what she thought was a simple plan. She wanted to give her Brooklyn brownstone—the home she’d owned for 40 years—to her daughter. “I want to see her enjoy it now,” she said, “and I’d rather just sign over the deed to avoid probate.” Her intentions were rooted in love and a desire for simplicity. But I had to explain that this simple act of generosity could saddle her daughter with a six-figure tax bill down the road.
The decision to transfer property is one of the most significant choices in family wealth stewardship. It’s a question of timing, taxes, and intention. While gifting a home during your lifetime feels straightforward, it often creates a tax trap that inheriting the same property avoids entirely.
The Capital Gains Trap: Carry-Over vs. Step-Up in Basis
When you gift property to someone, the recipient also receives your original cost basis. This is known as a “carry-over basis.” Let’s use the example of that Brooklyn brownstone. My client purchased it in the 1980s for $150,000. That’s her cost basis. Today, the property is worth nearly $2.5 million.
If she signs the deed over to her daughter, her daughter’s cost basis becomes that same $150,000. If her daughter decides to sell the home a few years later for $2.6 million, she faces a capital gain of $2.45 million. That gain is taxable. It is a staggering and often unexpected financial hit.
Inheritance works differently. When your daughter inherits the property after you pass away, the asset receives what’s called a “step-up in basis.” Under federal tax law, the property’s cost basis is adjusted to its fair market value on the date of death. If the brownstone is worth $2.5 million when my client passes, her daughter’s basis becomes $2.5 million. If she then sells it for $2.6 million, her taxable capital gain is only $100,000.
The difference is not trivial—it’s the difference between paying taxes on a few thousand dollars versus a few million. For most New York families with appreciated real estate, this rule alone makes inheritance the far more prudent path.
New York Estate Taxes and the Gift “Clawback”
While the step-up in basis addresses federal capital gains tax, we also must consider estate taxes at the state level. The federal estate tax exemption is high—over $13 million per person in 2024—meaning very few estates are subject to it. New York’s estate tax exemption, however, is significantly lower at $6.94 million.
For individuals whose estates approach or exceed this threshold, lifetime gifting can be a strategy to reduce the size of the taxable estate. You can give away assets to bring the total value below the exemption amount. However, New York has a specific rule that complicates this strategy: a three-year “clawback.”
Under New York Tax Law, any taxable gifts you make within three years of your death are added back to your estate for the purpose of calculating the state estate tax. This prevents people from giving away large portions of their estate on their deathbed simply to avoid taxes. Any gifting strategy intended to reduce New York estate tax must be executed with this three-year window in mind. It requires deliberate, long-term planning.
When Does Gifting Property Make Sense?
Despite the tax advantages of inheritance, some situations call for a lifetime gift of property. These decisions are not purely financial; they are deeply personal.
Planning for Long-Term Care
One of the most common reasons for gifting a home is to plan for future Medicaid eligibility for long-term care. To qualify for Medicaid, an individual’s assets must be below a certain low threshold. Transferring a home out of your name can help you qualify—but this is not a last-minute maneuver. Medicaid has a five-year look-back period for asset transfers. A gift made within that window can result in a penalty period, delaying eligibility for benefits. Intentional planning, often through an irrevocable trust, is critical.
Providing Immediate Help
Sometimes, the numbers on a tax return are secondary to a family’s immediate needs. A child may need capital to start a business, or a grandchild may need help with a down payment on their first home. In these cases, the desire to provide help now can outweigh the potential for future tax savings. The purpose of building wealth is, for many, to support the next generation. A prudent gift, made with full awareness of the tax implications, can be a powerful tool of stewardship.
The key is to make the decision with open eyes. You must understand the cost basis you are passing along and the potential tax liability you are creating for your loved one. It should be a conscious trade-off, not an expensive surprise.
Deciding to gift property or leave it as an inheritance is a matter of weighing your goals. It’s a conversation about legacy, your family’s needs, and the financial realities of the law. There is no universal answer—only a deliberate one.
Before you consider signing over a deed, a prudent first step is to analyze the financial impact. My firm can prepare a basis and tax-exposure analysis for your property, outlining the capital gains and estate tax consequences of gifting versus inheritance so you can make an informed and intentional choice.
