Liz Weston: Don't give your adult kids your house

Adding an adult child to your house deed, or giving them the home outright, might seem like a smart thing to do. It usually isn’t.

Transferring your house to your kids while you’re alive may avoid probate, the court process that otherwise follows death. But gifting a home also can result in a big, unnecessary tax bill and put your house at risk if your kids get sued or file for bankruptcy. You also could be making a big mistake if you hope it will help keep the house from being consumed by nursing home bills.

There are better ways to transfer a house to your kids, as well as a little-known potential fix that may help even if the giver has since died.

WHY YOU SHOULDN’T GIFT A HOUSE

If you bequeath a house to your kids — which means they get it after your death — they also get what’s known as a “step-up in tax basis.” All the appreciation that happened while you owned the house is never taxed.

Certified financial planner Kenneth Robinson of Rocky River, Ohio, says last year he advised a client not to let his mom give him her house. The mother paid $16,000 for her home in 1976, while the current market value is close to $200,000. None of that gain would be taxable if the son inherited the house, Robinson told his client.

The mother signed a quit claim to give her son the house anyway and died shortly afterward. That potentially meant a tax bill of about $32,000 for Robinson’s client.

Families who realize the mistake in time can undo the damage by gifting the house back to the parent, says Jennifer Sawday, a partner at TLD Law in Long Beach, California.

“We do last-minute deeds to get that house back in place when we know someone is dying,” Sawday says.

OTHER REASONS NOT TO GIFT A HOUSE

Sometimes people transfer a home to try to qualify for...