They Bought the House for $118,000 in 1989 and Are About to Deed It to Their Daughter to Skip Probate. When She Sells It for $650,000, She’ll Owe Capital Gains Tax That Inheriting It Would Have Erased
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A retired couple bought their house for $118,000 in 1989. They have watched a friend’s estate sit in probate court for months, and they want none of that for their daughter. Their plan is simple: sign a deed now, put the house in her name and keep the courthouse out of it.
The deed works. The house never passes through probate. Then, after the second parent dies, the daughter sells it for $650,000, and her accountant tells her she has a $532,000 taxable gain. If her parents had simply left her the house, that gain would have been close to zero.
They traded a probate bill for a capital gains bill. Of the two, probate is often the cheaper problem (we put the full estate checklist, beneficiary forms and titling included, in a free report here).
A Gift Carries the Parents’ 1989 Basis Forward
Under Internal Revenue Code Section 1015, property given away during life keeps the giver’s tax history. The daughter uses the donor’s adjusted basis, plus any gift tax paid. She steps into her parents’ shoes: what they paid in 1989 plus documented capital improvements becomes her starting point.
A different rule applies to inherited assets. Under Section 1014, the basis of inherited property is generally the fair market value of the property on the date of the individual’s death. All the growth during the parents’ lives drops out of the income tax system for good.
Deeding the House Locks In a $532,000 Gain
Using only the headline’s figures: sale price is $650,000, carryover basis is $118,000, taxable gain is $532,000. This assumes no improvement records; each documented addition reduces it.
The tax owed depends on her income, filing status, and state of residence. The gain itself is fixed when the deed is recorded.
Inheriting Would Have Reset Her Basis to Market Value
Suppose instead the parents keep the house, worth $650,000 on the surviving parent’s death. Her basis becomes that market value. If she sells at the same price, her gain is essentially zero. A gain on inherited property counts as long-term regardless of how long you held the property. She owes tax only on increase after death. Decades of growth since 1989 disappear.
Her Home-Sale Exclusion Will Not Rescue Her
Section 121 lets sellers exclude the first $250,000 of gain, or $500,000 for a married couple filing jointly. To qualify, she must have owned the home for at least 2 years and lived in the home as your main home for at least 2 years during the five years before the sale. If the daughter lives elsewhere, she fails the use test, so the exclusion shelters none of her gain.
Signing the Deed Triggers a Federal Gift Tax Return
The IRS sets the 2026 annual gift tax exclusion at $19,000 per recipient, according to Internal Revenue Service. A house tops that, so each parent generally files Form 709. The deed creates a federal return despite the parents’ intent to avoid paperwork.
Filing rarely means paying. Anything beyond the annual gift limit draws down each parent’s lives basic exclusion of $15,000,000 for 2026. The return typically costs only paperwork and preparer fees.
Giving the house away also creates a Medicaid look-back problem if either parent later needs long-term care. Consult an elder law attorney on this issue.
Two Probate Workarounds Keep the Step-Up Intact
Some states offer a transfer-on-death deed, also called a beneficiary deed. The parents keep full ownership and record a deed identifying their daughter as the one who takes title when they die. The house skips probate, counts as part of their estate, and takes a basis equal to its value when they die.
A revocable living trust works in every state. The parents retitle the house into the trust and retain control. At death, a successor trustee transfers the house to the daughter without probate. Because the parents could cancel the trust, the house counts as theirs at death and its basis adjusts to market value.
Steps to Take Before Anyone Signs
- Pull the 1989 closing statement and every improvement receipt to set the basis.
- Check with an estate attorney to see if your state recognizes transfer-on-death deeds.
- Compare revocable trust costs with typical probate costs in your county.
- If a deed is already signed, file Form 709 and give the daughter the basis records for her future sale.
Talk to an estate attorney before signing a deed. The parents are trying to dodge a probate bill, and the deed would subject $532,000 of gain to tax that inheriting the house would have eliminated.
Contact [email protected] for any questions or corrections.
Mike Barrington is a father, entrepreneur, businessman, visionary, and self-proclaimed technology guru. A thought leader in multiple industries, Mike has spent decades turning complex problems into even more complex solutions, often while wearing a Bluetooth headset and discussing market disruption.
When he's not revolutionizing business, mentoring future leaders, or leveraging synergies, Mike enjoys spending time with his family, staying ahead of emerging technologies, and reminding people that success isn't measured by money, but by the number of people who refer to you as a legend.
His personal motto: "Work smarter, not harder. Unless someone's watching."
