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. The strategy 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. You cannot do it without an estate attorney and a qualified appraiser, and 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 the property 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 rather than a gift. 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 the IRS publishes under Section 7520. That rate resets monthly. For October 2026, the IRS set the Section 7520 rate at 5.6%, derived from 120% of the applicable federal midterm rate. 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, and the more the remainder interest is worth. Higher interest rates shift value toward the life estate and away from the remainder, which is why the current rate environment matters to the calculation.

For broader context on where rates stand, the 10-year Treasury yield sat at roughly 4.96% on September 22, 2026, before surging to a one-year high of 5.31% on October 5, 2026. The 2026 calendar-year low was 3.97% in late February. A qualified appraiser establishes the property value; the federal tables handle the rest.

How Estate Inclusion Gets Avoided

Section 2036(a) generally pulls property back into a decedent’s taxable estate at full date-of-death value when the decedent retained the right to possess or enjoy it. A retained life estate is exactly that, which would normally doom the structure. The exception 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 pay from their own funds, at the tables’ value, with contemporaneous documentation showing that the consideration genuinely changed hands. An unpaid promissory note, a paper arrangement the family ignores in practice, or inadequate consideration collapses the entire structure and pulls the whole house back into the estate at full value.

Basis Step-Up You Give Up

This is the consequence most likely to be overlooked. Under Section 1014, property included in a decedent’s estate generally receives a basis reset to date-of-death value, wiping out decades of appreciation for capital gains purposes. Property excluded from the estate receives no such reset. Children who purchased a remainder interest take basis derived only from what they paid. On a home held for forty years, the lost step-up can dwarf any estate tax saved.

The stakes are especially high now that the 2026 federal estate and gift tax exemption stands at $15 million per individual (and $30 million for married couples) under the One Big Beautiful Bill Act. A family whose estate falls well under that threshold has no federal estate tax problem to solve. Using this structure in that situation can trade away a substantial basis benefit for no offsetting gain.

Medicaid and State Variation

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

Your Own Tax on the Sale

Section 121 excludes up to $250,000 of gain on a principal residence sale for single filers and $500,000 for joint filers, subject to the two-of-the-last-five-years ownership and use requirement. Its application to the sale of a remainder interest is governed by Treasury Regulation Section 1.121-4(e), which permits the exclusion in principle but denies it when the buyer is a related party as defined in Sections 267(b) or 707(b). Children are related parties under those definitions. The position is unsettled at the margins and cannot be assumed to apply favorably without professional analysis.

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, divorcing spouses, and premature deaths. Parents cannot sell or refinance the property without every child-owner signing. Family disagreements about the home become legal disputes rather than family conversations. Bring this to a qualified estate attorney and ask whether the structure fits your specific facts. The full estate checklist, from titling to beneficiary forms, is available in a free guide here.

Editor’s note: This update adds the IRS Section 7520 rate of 5.6% for October 2026, corrects the cited one-year Treasury yield high from 5.01% to 5.31% (reached October 5, 2026), and incorporates the current federal estate and gift tax exemption of $15 million per individual under the One Big Beautiful Bill Act.

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