3433: [Part 2] Transferring a Primary Residence to Children by Sean Mullaney of FI Tax Guy on Legacy Decisions

Summary

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Episode Overview

Podcast: Optimal Finance Daily
Host: Diania Merriam
Episode: 3433 - [Part 2] Transferring a Primary Residence to Children by Sean Mullaney (FI Tax Guy)
Date: January 24, 2026

In this episode, Diania Merriam narrates Part 2 of Sean Mullaney's comprehensive guide on the best practices and pitfalls of transferring a primary residence to children. The discussion reveals the complexities of joint tenancies, outright gifting, revocable living trusts, and considerations for avoiding hefty taxes and legal disputes. The goal is to help listeners make informed legacy decisions and preserve family wealth with minimal complications.

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Key Discussion Points & Insights

1. The Problems with Joint Tenancy

Timestamp: 01:10 - 04:12

• Capital Gains Tax Issues:

  • If the parent dies while still owning the house, capital gains tax is generally not a problem since heirs get a “step up” in basis.
  • However, selling the home before the owner’s death can create tax issues for the adult child, because the capital gains exclusion on a primary residence ($250K per person) typically only protects the owner—not the children.
    • Quote:

      “The adult child is not protected by that [exclusion]. If the home is not their primary residence, the adult child could have to pay capital gains tax based on their share of the proceeds…” – Sean Mullaney (02:12)

• Loss of Control:

  • Giving up part ownership means the parent relinquishes some decision-making abilities, which could be problematic if circumstances change.
    • Quote:

      “You never know if you'll need that control in the future. Proceed with significant caution and consult a trusted lawyer prior to putting anyone else on the title of your home.” – Sean Mullaney (03:00)

• Gift Tax Considerations:

  • Adding someone to a title is considered a gift, generally requiring the filing of IRS Form 709. While high exemptions make actual gift taxes rare, paperwork is still necessary.

• Sibling Disputes:

  • Naming several children as joint owners can lead to disputes, especially if they disagree on what to do with the property.
  • Using a revocable living trust instead allows parents to lay out clear instructions and choose a trustee.

• Children’s Personal Issues:

  • Life happens: divorces, bankruptcies, lawsuits. Giving ownership to an adult child exposes the family home to that child’s creditors.
    • Quote:

      “Putting an adult child on the title of a home could subject the home to the adult child's creditors in a problematic manner.” – Sean Mullaney (04:08)

Summary: Joint tenancy can seem simple, but it exposes the family to unexpected taxes, possible loss of control, legal hassles, and liability.

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2. Outright Gifting vs. Inheritance

Timestamp: 04:12 - 05:56

• Outright Gifting:

  • If a parent gifts their house to a child while alive, the child’s “cost basis” is the original purchase price, not the current market value—potentially creating a massive tax bill upon sale.
    • Example given:
      • William bought a house in 1970 for $50,000. By 2019, it’s worth $950,000.
      • If William gifts it to his son Alan, Alan’s basis is $50,000.
      • If Alan inherits, the basis is “stepped up” to $950,000, drastically reducing any capital gains taxes if he sells.
    • Notable Moment (Sean Mullaney) [05:56]:

      “Giving William's house to Allen during William's lifetime could increase the capital gains taxable to Allen by $900,000.”

    • Diania’s Reaction [05:56]:

      “Ouch.”

• Advice:

  • Consult with a lawyer before making any property transfers.
  • Be especially "hesitant" to simply gift your home outright to a child.

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3. Best Estate Transfer Approaches

Timestamp: 05:58 - 06:54

• Preferred Solution: Revocable Living Trusts

  • Keeps control with the parent during their lifetime.
  • Smoothly transfers real estate with clear instructions while avoiding probate and minimizing tax risk.
  • Will can be effective, but always consult a lawyer due to varying state laws.
  • Some states offer transfer-on-death deeds—again, review your options with a legal professional.

• Action Steps:

  1. Consult both a lawyer and tax advisor before any home transfer decision.
  2. If you inherit a house, get legal/tax help before selling.

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4. The Value of Trusts in Estate Planning

Timestamp: 08:33 - 09:41

• Advantages of Trusts Over Wills:
  • Time and Money: Assets in trusts avoid probate, allowing for a faster, less expensive transfer.
  • Privacy: Probate is a public process; trusts are private.
  • Certainty: Trusts allow clear beneficiary plans and ground rules after death.
    • Quote from Diania Merriam:

      “Assets in a trust could be distributed in as little as a few weeks, all while avoiding expensive fees and taxes… Since trusts are not subject to probate, your estate remains a private matter.” (09:10)

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Notable Quotes & Memorable Moments

• On Capital Gains and Joint Tenancy [02:15]:

  “If the home is not their primary residence, the adult child could have to pay capital gains tax based on their share of the proceeds…”
  — Sean Mullaney

• On Loss of Control [03:00]:

  “You never know if you'll need that control in the future. Proceed with significant caution and consult a trusted lawyer prior to putting anyone else on the title of your home.”
  — Sean Mullaney

• On Outright Gifts [05:56]:

  “Giving William's house to Allen during William's lifetime could increase the capital gains taxable to Allen by $900,000.”
  — Sean Mullaney
  “Ouch.”
  — Diania Merriam

• On Benefits of Trusts [09:10]:

  “Assets in a trust could be distributed in as little as a few weeks, all while avoiding expensive fees and taxes… Since trusts are not subject to probate, your estate remains a private matter.”
  — Diania Merriam

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Segment Timestamps

• Problems with Joint Tenancy: 01:10 – 04:12
• Outright Gifting Explained: 04:12 – 05:56
• Conclusions and Best Practices: 05:58 – 06:54
• Trusts and Estate Planning: 08:33 – 09:41

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Final Takeaways

• Think twice before adding a child to your home's deed; unexpected taxes and loss of control are real risks.
• Outright gifts of homes almost always lead to worse tax consequences than inheritance.
• A revocable living trust is generally the best approach—smooth, clear, and tax smart.
• Always consult with a lawyer and tax pro before making big estate decisions.

This episode offers critical insight for anyone planning how to pass property to children, making a potentially confusing topic digestible and actionable.

Transcript

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This is optimal Finance Daily Transferring a Primary Residence to Children Part 2 by Sean Mullaney of fitaxguy.com Other problems with Joint Tenancies if the capital gains tax upon the original owner's death isn't an issue, why not use a joint tenancy to transfer your house to your adult children? Here are some of the Capital Gains tax Wait, what? I thought you said capital gains taxes were not an issue. They generally aren't an issue after the original owner's death, but they can be an issue before his or her death. What if, during the owner's lifetime, the house is sold? What if there's a pressing need to sell the house, perhaps to help pay for long term care? The owner occupant is at least somewhat protected by the $250,000 per person primary residence gain exclusion, but the adult child is not protected by that exclusion. If the home is not their primary residence, the adult child could have to pay capital gains tax based on their share of the proceeds, less their share of the owner's historic tax basis on the transaction. If the house is sold prior to the owner or occupant's death Loss of Control Simply put, transferring an interest in your home to another person relinquishes some of your control over the property. You never know if you'll need that control in the future. Proceed with significant caution and consult a trusted lawyer prior to putting anyone else on the title of your home. Gift Tax While not a horrible problem, adding an adult child to the title of a house as a gift requires the filing of Form 709 gift tax return. Due to the high estate and gift tax exemptions in most cases, it's highly unlikely the transfer would trigger actual gift tax disputes among adult children. Adding multiple adult children to the title as joint tenants with rights of survivorship can create issues after the parent's death. If siblings cannot agree amongst themselves how to handle and or dispose of the house, the disagreement can be difficult to resolve. Using a revocable living trust which becomes irrevocable upon the parent's death, gives the parent the opportunity to work with their lawyer to put in place a trustee and ground rules for how the house is to be managed and or disposed of after death and Children's Issues Adult children are people and people have problems. Divorces, liabilities, bankruptcies, etc. Putting an adult child on the title of a home could subject the home to the adult child's creditors in a problematic manner. Summary these are just some of the considerations to weigh before adding adult children to the title of a home as a joint tenant with rights of survivorship. Revocable living trusts keep control with the original owner. Further, they facilitate transferring real estate to the next generation in a tax efficient manner. Based on these advantages and the issues that exist with joint tenancies, I generally prefer revocable living trusts over joint tenancies for primary residences. Using a will can also be effective from a tax perspective, but should be discussed with a lawyer considering state and local real estate laws. Some states have transfer on death type real estate deeds which also should be considered with a lawyer if that sort of deed is available. Outright Gift yout might be saying, well, I only have one child I want to give my house to. Further, I don't need to own my house. Why not simply give the house outright to the child during my life and avoid any legal events or issues occurring at my death? Besides some of the issues discussed earlier and the full loss of control which are troublesome enough, an outright gift creates a significant capital gains tax issue for the adult child. This capital gains tax issue exists both before and after the original owner's death. Previously, I wrote this example on the blog illustrating the issue. William lives in a house he purchased in 1970 for $50,000. In 2019, the house is worth $950,000. If William Gifts the house to his son Alan In 2019, Alan's basis in the house is $50,000. However, if William leaves the house to Allen at William's death, Allen's basis in the house will be at the fair market value of the house at William's death. Giving William's house to Allen during William's lifetime could increase the capital gains taxable to Allan by $900,000.

[A]

Ouch.

[B]

So whatever you do a consult with your lawyer before determining how to pass your house to your children and b be very, very hesitant to outright give your house to your child. Conclusion There are various ways in which you can transfer your home to your children. In many cases, I believe revocable living trusts are a great way to leave a house to children. You're always well advised to consult with your lawyer before making any decisions on how you want to title your house and how you want to transfer your house. If you do inherit a house from your parents, you should consult with a lawyer regarding titling issues and with your tax professional regarding the tax implications of selling the inherited home. You just listened to part two of the post titled Transferring a Primary Residence to Children by Sean Mullaney of fintaxguy.com.

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