They Sold the House to the Kids for Its Value Minus the Right to Live in It. The IRS Publishes the Discount, and It Grows Every Year They Age

If you own your home outright and your kids will inherit it, a tax-code technique lets you sell them the house today at a discount the IRS publishes, with the discount growing with each birthday you have. It is called a sale of a remainder interest with a retained life estate, and the mechanics turn on federal actuarial tables under Internal Revenue Code Section 7520. This is the most technically demanding move in personal finance real estate planning, and you cannot do it without an estate attorney and a qualified appraiser, as misapplying it can be catastrophic.

Splitting One House Into Two Assets

You can divide homeownership into two pieces. The life estate is the right to occupy the property until death. The remainder interest is the right to own it outright once the life tenant dies. Parents keep the life estate and sell the remainder interest to their children for its actuarially determined value. Because the children pay full value for exactly what they receive, the transaction qualifies as a sale. That distinction is the hinge on which every tax consequence turns.

Where the Discount Comes From

The two interests are valued using federal actuarial tables and a monthly interest rate published by the IRS under Section 7520. The Section 7520 rate resets monthly, and the tables in IRS Publication 1457 assign a factor based on the life tenant’s age at transfer. The older the life tenant, the shorter the expected remaining occupancy, so the remainder interest is worth more. Higher interest rates shift value toward the life estate and away from the remainder. For context, the 10-year Treasury yield sat at 4.96% on September 22, 2026, near its one-year high of 5.01%, materially higher than the 3.97% low on February 27, 2026. A qualified appraiser establishes the property value; the tables do the rest.

How Estate Inclusion Gets Avoided

Section 2036(a) generally drags property back into a decedent’s taxable estate at full date-of-death value when the decedent kept the right to possess or enjoy it. Retaining a life estate is exactly that. The exception that makes this structure work sits inside the same statute: inclusion does not apply where the transfer was a bona fide sale for adequate and full consideration. The children must genuinely pay from their own funds at the tables’ value, with contemporaneous documentation. Inadequate consideration, unpaid notes, or a paper arrangement the family does not respect in substance collapses the entire structure and pulls the whole house back into the estate.

Basis Step-Up You Give Up

This consequence is most likely to be buried. Under Section 1014, property held until death generally gets a basis reset to date-of-death value, wiping out decades of appreciation for capital gains purposes. Property excluded from the estate does not get that step-up. Children who purchased a remainder interest take basis derived from what they paid. On a home held for forty years, the lost step-up can dwarf any estate tax saved. For a family whose estate falls well under the federal exemption, this structure can trade away a large basis benefit to solve a problem the family does not have.

Medicaid and State Variation

Some state Medicaid programs treat a sale at full actuarial value as a sale rather than a penalized transfer. Others scrutinize intrafamily transfers closely. Treatment varies by state, the consideration must actually change hands and be documented, and the cash the parents receive becomes a countable resource that must be spent or invested. Do not assume your state follows the favorable view. The applicable state’s rules govern entirely.

Your Own Tax on the Sale

Section 121 excludes up to $250,000 of gain on the sale of a principal residence for single filers and $500,000 for joint filers, subject to two-of-the-last-five-years ownership and use. Its application to the sale of a remainder interest is governed by Treasury Regulation Section 1.121-4(e), which permits the exclusion but denies it when the buyer is a related party as defined in Sections 267(b) or 707(b). Children are related parties. The position is unsettled at the margins and must not be assumed.

Risks You Inherit With the Structure

From the moment of sale, the children own a legal interest in the home. That interest is exposed to creditors, divorces, and deaths. Parents cannot sell or refinance without every child-owner signing. Family disagreements about the property become legal matters. Your job as the reader is to bring this to a qualified estate attorney and ask whether it fits your facts (we put the full estate checklist, from titling to beneficiary forms, in a free guide here).

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