Are you trying to pass down your home to your kids? In this post, we’ll walk through how to avoid capital gains once your children inherit your house, what to do, what not to do, and how this gets done properly through a Life Estate.
I want to show you what a life estate is, how to use it correctly, and why it matters.
What Is a Life Estate?
A life estate is a legal arrangement. It’s a simple document you record with the county records stating that if something happens to you, that property will automatically become your child’s property upon your death.
During your lifetime, the home belongs entirely to you. You can live in it, sell it, refinance it, pay taxes, or do anything you want with it.
It is only upon proof of death or when your child brings the death certificate to the county that the property transfers immediately to them. Because the original life estate deed was recorded, the county already knows the home should pass to your son or daughter.
It is essentially a way of renaming your home from your name, to your child’s, name at the moment of death. And the great thing, this is all accomplished without going through court system.
Why a Life Estate Matters
The 2 biggest reasons to use a life estate:
- Avoid capital gains taxes when children sell the property
- Avoid probate — the long court process of determining legal inheritors
Probate delays inheritance, requires proof of relationship, and leaves your home locked in the court system. A life estate prevents all of that.
The Wrong Way to Handle Your House
Let’s use an example.
Maria buys her home in 1995 for $150,000.
By 2025, the home is now worth $550,000.
Trying to “keep things simple,” she adds her son to the deed at the county.
That is a major mistake.
What Happens Financially?
- Sales Price: $550,000
- Original Basis: $150,000
- Taxable Gain: $400,000
- Capital Gains Tax (20%): $80,000
Adding her son to the deed just cost him $80,000. This is a mistake many people make.
Do NOT put your children on your deed. As a licensed CPA Firm, we see this mistake all the time.
The Correct Way: Using a Life Estate
Maria instead files a life estate deed with the county recorder. Throughout her life, nothing changes — it is still her home. She pays taxes, can refinance, and remains in full control.
When Maria passes, her son takes the death certificate to the county, and the home becomes his instantly — without probate.
Now the Numbers Work Differently
The son gets a fair market value appraisal within about 60 days of death. The appraised fair market value comes in at $550,000.
Even though Maria originally paid $150,000…
Because of the step-up basis rule, the new cost basis becomes the fair market value at death — $550,000.
He sells the home for $550,000 — resulting in:
- Sales Price: $550,000
- Stepped-Up Basis: $550,000
- Taxable Gain: $0
- Capital Gains Tax: $0
By filing the life estate properly, the family avoided $80,000 in capital gains tax.
Important Considerations Before Filing a Life Estate
- You cannot remove the child from the deed without their consent
- This can impact Medicaid or long-term care planning (look-back period)
- Refinancing later may require the remainder person (your child) to sign. This is not always the case, but possible
- Do NOT put multiple homes under one life estate because each property needs its own deed
- If there is a mortgage, check the lender’s rules first
- Before making big decisions like this, always speak with a CPA or attorney who understands estate planning
Why This Matters
Estate planning is not just about money, it’s about clarity. It’s about ensuring your family inherits your home in the best possible way, without court battles, confusion, or wasted money.
A life estate is one tool you should seriously consider. Talk to a CPA, an estate planning attorney, or someone who understands your specific case because it can save your family lots of taxes, stress, and time.
If you have any questions, don’t hesitate to give us a call.