Want to leave your house to your kids? Do it the right way, or you could hand them a massive tax bill.
The mistake
To avoid probate court, some families have the parents sign a quitclaim deed that turns the home over to the kids before the parents die.
It feels smart. It’s one of the most foolish moves you can make, because it throws away a tax break built right into the law.
The tax break you lose: “step-up” in basis
When kids inherit a home, it’s valued at what it was worth on the day of death.
Say Mom and Dad bought the house years ago for $50,000, and it’s worth $500,000 when they pass. The kids’ basis becomes $500,000.
Why does that matter? When they sell, they pay capital gains tax only on profit above the basis. Higher basis = less profit = less tax.
What the quitclaim does
Quitclaim the house to your kids and they take your basis: what you paid, plus major improvements. In the example, that’s $50,000 instead of $500,000.
That means way more profit on paper when they sell, and way more capital gains tax.
Better ways to pass on the house
- A trust. Put the house in a trust, which bypasses probate. A trustee takes over when you die, with instructions for dividing it up.
- A beneficiary deed. It transfers the home automatically to the named beneficiaries at the moment of death.
- A will. Works too, but the house will go through probate.
Any of these has better tax consequences than a quitclaim deed. Talk to an estate planning attorney before you sign anything.
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