'The property is very old and requires significant ongoing maintenance'

"The property is very old and requires significant ongoing maintenance." (Photo subject is a model.)

Dear Quentin,

I was gifted a property from my parents several years ago when my children were very young. The property has appreciated significantly in value since then, and I am now trying to figure out what makes the most financial and practical sense.

My mother is still living and has a reasonably substantial estate. I have never really been able to get a clear explanation as to why the property was gifted to me when it was. At the time, I was told that there would be financial support to help with the property.

However, after my father passed away, that support has been inconsistent - sometimes substantial and other times essentially nonexistent, without much explanation. I was also much younger when this happened and did not fully understand the tax and estate planning.

The property is very old and requires significant ongoing maintenance. My total annual costs to maintain it are approximately $20,000 to $25,000. With my spouse recently passing away, I am increasingly concerned that I may not be able to manage the property and its expenses alone.

I could potentially face capital gains in the mid-six figures if I sell it. I am concerned about holding onto an expensive property for another 10-20 years when I don't know where my children will ultimately live or whether they will even want or be able to maintain it.

This has led me to wonder whether it is possible - and whether it would make financial sense - to return the property to my mother's estate while she is still alive. If so, how does that work from a tax and estate-planning perspective?

Specifically, I am wondering:

-- If I transferred the property back to my mother while she was living, could it eventually pass through her estate and receive a step-up in basis at the time of her death?

-- Are there gift-tax, capital-gains, Medicaid, estate-tax, or other consequences I should be aware of if I transfer the property back?

-- Given that my mother is in her 90s and may have another 5-6 years, does it make sense to consider holding the property until her death?

I realize this is something I probably need to discuss with an estate-planning attorney and a CPA who understand both real estate and estate taxation. I am just trying to understand whether this is a reasonable option before I spend money pursuing it.

The Daughter

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You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

By gifting you the house, you received your mother's tax basis rather than a step-up to its fair market value.

Dear Daughter,

Don't forget the potential home-sale exclusion.

By gifting you the house, you received your mother's tax basis rather than a step-up to its fair market value. If her adjusted basis was $200,000 and you sold the home for $800,000, your capital gain would be based on that $200,000 basis. However, if you have lived there for at least two of the five years before selling, you may qualify for the federal home-sale exclusion. That exclusion can shelter up to $250,000 of gain, or up to $500,000 for married couples filing jointly. There is also a special rule that can allow a surviving spouse to use the $500,000 exclusion for a sale occurring within two years after their spouse's death, provided all requirements are met.

Let's say the house could go up in value by, say, $200,000 before your mother dies. It's also not inconceivable that your mother dies within a year of you transferring the house back - which would be unfortunate, not least for your mother - but from a tax-planning standpoint, it could mean that you lose the potential step-up in basis under the one-year rule. So you would have gone through the hassle and expense of transferring the property for no tax reason. If you have siblings, you should have an estate-planning attorney review your mother's estate plan to make sure the property will pass to you as intended, rather than relying on a promise.

There is a special rule that can allow a surviving spouse to use the $500,000 exclusion for a sale occurring within two years after their spouse's death.

The fact that your mother gave you the property doesn't, in itself, prevent you from transferring it back to her and receiving a step-up in basis when she dies. The original gift and "regifting" are treated as two separate transactions for tax purposes. However, there is an important exception to keep in mind: Section 1014(e) can prevent a step-up when property is transferred to someone who dies within one year and the property again passes back to the original donor. If your mother gave you the house in 2016 and you transfer it back to her in 2026, the fact that 10 years have passed does not by itself prevent a future step-up. You can read more about the U.S. Code --1014 here.

Yes, transferring the property back would be treated as a gift for federal gift-tax purposes, but it would not create capital gains because there has been no sale. So just because it's a gift subject to the federal gift-tax rules does not mean you would have to pay gift tax out of pocket. In 2026, the lifetime federal estate and gift tax exemption is $15 million per person, so a taxable gift uses part of the donor's available lifetime exemption; just file IRS Form 709 if required. If you have not used up your lifetime exemption, you would not owe gift tax as a result of this transfer.

The year of the original gift isn't really the issue here. What matters most is what happens after you hand the property back - in the event that you do - including whether your mother survives the transfer for more than one year. She must also be of sound mind and/or have the legal capacity to understand and consent to the transaction and sign the necessary documents. A transfer to an elderly parent could also affect Medicaid eligibility or estate recovery, depending on your mother's circumstances. Given the property's value and your mother's age, hire an estate-planning attorney and CPA before transferring the property.

If the potential capital-gains bill is substantial, it's the ultimate regifting. If done right, it could save you a packet.

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-Quentin Fottrell