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“Mom wants to sign her house over to my brother and me, so if she ends up in a nursing home, Medicaid can’t take it. Is that smart?”
Let’s say that’s you, and your name is Carol. You’re 58. Your mother, Ruth, is 84, still in the house she bought in 1989 for $90,000. Today it’s worth about $400,000. A friend at church swears deeding it to the kids “saved” her family’s home.
Carol’s fear makes sense. A semi-private nursing home room now runs a national median of $114,975 a year. (1) Someone turning 65 has almost a 70% chance of needing some type of long-term care. (2) And “Medicare doesn’t pay for long-term care.” (3)
I’ve been a CPA since 1981, and I was executor of my own parents’ estate. Here’s my answer: in most families, deeding the house to the kids is a mistake twice over.
First, federal law lets Medicaid look back 60 months at any assets your parent gave away. (4) Second, the IRS treats a gifted house very differently from an inherited one. (5)
In Carol’s case, that second problem alone could cost her and her brother about $46,500 in federal tax. Here are seven things to know before anyone signs a deed.
1. The five-year look-back can turn the gift into a penalty
When someone applies for Medicaid nursing home coverage, the state reviews transfers made in the previous 60 months. (4)
Give away an asset for less than it’s worth, and Medicaid imposes a period of ineligibility. The formula: the value given away, divided by the average monthly cost of private-pay nursing home care in your state. (4)
Using the national median as a rough stand-in, roughly $9,600 a month (1), a $400,000 house works out to more than three years without coverage. Your state’s number will differ, but the math is brutal either way.
2. The tax trap: Your kids lose the step-up
This is the part almost nobody mentions at the kitchen table.
If you receive property as a gift, “your basis is the donor’s adjusted basis at the time you received the gift.” (5) In plain English, Carol and her brother would take on Ruth’s $90,000 cost, not today’s $400,000 value.
If they inherit the house instead, their basis is generally the fair market value on the date of death. (5)
Sell for $400,000 after a gift, and they’d report a $310,000 gain. At a 15% capital gains rate, that’s about $46,500 in federal tax, before any state tax. Sell after an inheritance, and the taxable gain could be close to zero.
3. The kids probably can’t use the home-sale exclusion
Homeowners can usually exclude up to $250,000 of gain, or $500,000 for married couples, when they sell. (6)
But you have to have owned the home and lived in it for at least two of the five years before the sale. (6) Adult children who live across town, or across the country, typically won’t qualify.
There’s also paperwork. A gift worth more than $19,000 to one person in 2026 generally requires the giver to file a gift tax return. (7) Tax usually isn’t owed, but the filing is.
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4. Mom loses control of her own home
Once the deed changes, the house belongs to the kids. If one of them gets divorced, sued or falls behind on debts, Mom’s home can get pulled into it.
She also can’t sell, refinance or borrow against it without their signatures. That’s a lot of power to hand anyone, even children you trust.
Keeping the house in Mom’s name also keeps another tool on the table.
If she’s 62 or older, the equity in her home could become cash she can use now. A reverse mortgage lets eligible homeowners convert part of their home equity into funds — while keeping ownership of their home, which could help pay for care at home. She’d still owe property taxes, insurance and upkeep. See how a reverse mortgage works and whether you qualify.
5. Estate recovery is real, but it has limits
Here’s what’s behind the fear. For people 55 and older, “states are required to seek recovery of payments from the individual’s estate for nursing facility services.” (8) The estate typically includes the home.
But states can’t recover from the estate of someone survived by a spouse, a child under 21, or a blind or disabled child of any age. (8) States must also have procedures to waive recovery in cases of undue hardship. (8)
And a home is often protected for eligibility purposes while Mom or a spouse lives there, up to a home-equity limit that is at least $752,000 in 2026 and as high as $1,130,000 in some states. (9)
6. The legal exceptions are narrow
Federal law does allow some home transfers without a penalty: to a spouse, to a child under 21 or a child who is blind or disabled, or to a sibling with an equity interest who lived there at least a year. (4)
There’s also the “caregiver child” exception. A son or daughter who lived in the home for at least two years and provided care that kept the parent out of a nursing home may receive the house. (4)
Rules vary by state. If your family might fit one of these, pay for an hour with an elder law attorney before anyone signs.
7. What I’d do instead
Plan early. Long-term care insurance is typically cheapest in your 50s or early 60s. For Ruth it may be too late, but for Carol it isn’t. Long-term care insurance helps fill that gap, covering services like home care, assisted living, and help with daily tasks. See a list of the best LTC insurance companies.
Get a real estate plan. A will or trust lets the house pass at death, when the kids get the step-up.
With Trust & Will, a will is yours in minutes for $199, and a trust is starting at just $499. (A trust designed specifically for Medicaid planning is different, and also subject to the look-back. That’s an elder law attorney’s job.)
And run the whole picture with a pro. SmartAsset matches you, free, with up to three fiduciary advisors who are legally required to put your interests first. Have $100K+ in investments? Get matched free in minutes.
The bottom line
Carol’s mom isn’t wrong to want to protect the house. She just picked the tool that can backfire with both Medicaid and the IRS.
Give the house away within five years of needing care, and you can trigger a Medicaid penalty. Give it away at any point, and you can hand your kids a tax bill they’d never have owed.
The best way to leave your children a home is usually the old-fashioned way: keep it, plan for care, and let them inherit it.
Sources: 1. CareScout/Genworth; 2. Administration for Community Living; 3. Medicare.gov; 4. Social Security Act, Section 1917; 5. IRS Publication 551; 6. IRS Publication 523; 7. IRS; 8. Medicaid.gov; 9. Centers for Medicare & Medicaid Services
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