Do I pay capital gains tax if I gift my house to my child?

You generally owe no gift tax at the time, but you create a future capital gains problem. When you gift a home during your lifetime, your child takes your original cost basis (what you paid, plus improvements). If they later sell, they owe capital gains tax on the growth since you bought it. Had they inherited the home instead, the basis would 'step up' to its value at your death, often eliminating that gain.

Is it better to gift a house or leave it in your will?

For an appreciated home, leaving it through your estate is usually better tax-wise. Inheriting gives your heirs a stepped-up basis equal to the home's date-of-death value, which can erase decades of capital gains. Gifting it during life keeps your (lower) basis, which can cost far more in capital gains than the 4.5% Pennsylvania inheritance tax you were trying to avoid. The exception is Medicaid planning, where other rules apply.

How much is capital gains tax on an inherited home in Pennsylvania?

Often little or nothing. An inherited home receives a stepped-up basis to its fair market value on the date of death. If your heirs sell near that value, there is little or no taxable gain. They would only owe capital gains on appreciation that occurs after they inherit it.

Does adding my child to the deed avoid capital gains?

No — it usually makes things worse. Adding a child to your deed is a partial gift, so that share carries your original basis and loses the step-up. It also exposes your home to the child's creditors, divorce, and lawsuits. It is rarely the right move.

Gifting Your Home to Your Kids? The Capital Gains Tax Trap in PA

It is one of the most common instincts we see in Western Pennsylvania families: "I'll just put the house in my kids' names now." The goals are good — avoid probate, sidestep inheritance tax, maybe protect the home from a nursing home. But gifting your home during your lifetime can hand your children a capital gains tax bill they would have completely avoided by inheriting it instead.

Here is the trap, and how to think about it.

Stepped-Up Basis vs. Carryover Basis

The whole issue comes down to one word: basis — your cost in the property for tax purposes.

If you gift the home during your life, your child takes your carryover basis — essentially what you originally paid, plus improvements (IRC § 1015).
If your child inherits the home at your death, the basis steps up to the home's fair market value on the date of death (IRC § 1014).

Capital gains tax is charged on the difference between the sale price and the basis. So a low basis means a big taxable gain; a stepped-up basis can wipe the gain out entirely.

A Real-World Example

Say you bought your home in 1990 for $60,000, and today it is worth $400,000.

If you gift it to your child now and they later sell for $400,000:

Their basis is your $60,000.
Their taxable gain is $340,000.
At federal long-term capital gains rates (often 15%–20%), plus a possible 3.8% net investment income surtax, plus Pennsylvania's 3.07% income tax, the bill can easily exceed $60,000.

If your child instead inherits it and sells for $400,000:

Their basis steps up to $400,000.
Their taxable gain is about $0 — and so is the capital gains tax.

Same house, same sale price. The difference is when it transferred.

"But I'm Avoiding the Inheritance Tax"

This is the part that surprises people. Yes — gifting the home more than a year before death can avoid Pennsylvania's 4.5% inheritance tax to a child (on a $400,000 home, that is $18,000).

But look at the trade-off: you saved $18,000 in inheritance tax and created a $60,000+ capital gains bill. Gifting to dodge the 4.5% inheritance tax is often penny-wise and pound-foolish — you spend far more in capital gains than you ever saved.

There is also a primary-residence exclusion most families lose when they gift. If you sold the home you live in, you could exclude up to $250,000 of gain ($500,000 for a married couple) under IRC § 121. Your child, who does not live there, generally cannot use that exclusion after receiving it as a gift.

When Gifting a Home Can Still Make Sense

This is not a blanket "never gift." In the right situation, lifetime transfers are a valuable tool — for example:

Medicaid / long-term care planning, where getting the home out of your name (subject to the five-year lookback) may be the goal, and capital gains is a secondary concern.
Low-appreciation property, where there is little built-in gain to worry about.
Situations where keeping control isn't important and probate avoidance is the priority.

Even then, there are usually better-structured ways to reach the goal — a life estate deed or an irrevocable trust can often preserve the step-up and accomplish the planning objective. And whatever you do, avoid simply adding a child to your deed — it triggers the same basis problem on the gifted share and exposes your home to your child's creditors and divorce (more on that in Should You Put Your Kids on the Deed?).

The Bottom Line

Before you transfer your home to your children, run the capital gains math, not just the inheritance-tax math. For most families with an appreciated home, letting it pass through the estate — and capturing the stepped-up basis — saves far more than gifting ever would.

The right answer depends on your home's basis, your health and Medicaid timeline, and your family's goals. At Ament Law Group, we help Western Pennsylvania families weigh all three. Call (724) 733-3500 or schedule a free consultation.

Related reading:

John W. Ament, Esq.

John W. Ament is a partner and co-founder of Ament Law Group, P.C. in Murrysville, PA. He holds a J.D./M.B.A. from Duquesne University and is a member of the National Academy of Elder Law Attorneys (NAELA), PAELA, and the Pittsburgh Estate Planning Council.

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