Don’t Deed Your House to Your Kids in Texas: The Tax Trap and Better Options

A common idea for avoiding probate is to sign the house over to the kids while you are still alive. It seems simple: if they already own it, there is nothing to probate. In Texas, it is usually one of the most expensive mistakes a family can make. It can cost your children a large capital gains tax bill, cost you your homestead exemption, and put your home within reach of your children’s creditors and divorces.

The Capital Gains Problem

When you give property away during your life, the person who receives it takes your tax basis, generally what you paid plus improvements (26 U.S.C. § 1015). When someone inherits property at death, the basis generally resets to the value on the date of death (26 U.S.C. § 1014).

An example. A widow bought her Austin home in 1995 for $180,000. It is now worth $900,000.

• She deeds it to her son now. His basis is about $180,000. If he sells it after she dies for $900,000, he has roughly a $720,000 gain. He cannot use the home sale exclusion because he never lived there, so federal capital gains tax and the net investment income tax could take well over $100,000.
• He inherits it instead. His basis becomes about $900,000. A sale at that price produces little or no gain.

For married couples, Texas community property can give an even bigger benefit at the first death. See the double step-up for Texas community property.

You Could Lose Your Homestead Exemption

A Texas residence homestead exemption generally requires that you own the home and live in it as your principal residence (Texas Tax Code § 11.13). If your children own the house, you may lose the exemption and, if you are 65 or older, the tax ceiling that freezes your school district taxes. Your property tax bill can go up the next year. The Tax Code does let you keep the exemption if you hold a life estate or the home is in a qualifying trust, which is one reason those tools work better.

Your Home Is Exposed to Your Children’s Problems

Once your children own the house, it is their property. If one of them is sued, goes through a divorce, files bankruptcy or has a tax lien, the house can be pulled into it. If a child dies before you, their share passes under their will or to their heirs, which may include a spouse you did not intend to benefit.

You Lose Control

You cannot sell, refinance or take out a reverse mortgage without your children’s signatures. If you want to move, you need all of them to agree. If they disagree with each other, you can end up in the middle of a family dispute about your own home.

Medicaid and Gift Tax Rules

• Medicaid: giving away assets within the 5-year look-back period before applying for long-term care Medicaid can delay eligibility.
• Gift tax return: a gift of a house to one person is almost always above the annual exclusion ($19,000 per recipient in 2026), so you generally must file a federal gift tax return (Form 709). Tax is rarely owed because of the $15 million lifetime exemption, but the filing is still required. See lifetime gifting in Texas.

Better Ways to Leave Your House to Your Children in Texas

• Transfer on death deed. You keep full ownership during life, and the house passes to the people you name at your death without probate (Texas Estates Code chapter 114). You can change it at any time.
• Lady bird deed. An enhanced life estate deed lets you keep control, including the right to sell or mortgage, and passes the house at death. See what is a lady bird deed and transfer on death deeds vs. lady bird deeds.
• Revocable living trust. The house goes into your trust, you stay in control as trustee, and the trust can hold your children’s shares in protective trusts instead of giving them the house outright.

With each of these, the house is still part of your estate for tax purposes, so your children generally get the new basis at your death, and you keep your homestead exemption.

When a Lifetime Gift Can Make Sense

There are cases where giving property away during life is the right call, such as a very large estate where removing future growth from the estate saves estate tax, or property with a high basis and little built-in gain. Those gifts are usually made to a carefully drafted trust, not outright to children. We cover this on our estate tax planning page.

Frequently Asked Questions

Does adding my child to the deed avoid probate?

It can, but it is still a gift of part of the house, with the same basis, homestead and creditor problems for that share. A transfer on death deed or lady bird deed usually avoids probate without those problems.

I already deeded my house to my kids. Can it be fixed?

Sometimes. Depending on the facts, the children may be able to deed it back, or other steps may help. Talk to an attorney and your CPA before anyone signs anything else.

Does a transfer on death deed protect the house from Medicaid estate recovery?

In Texas, Medicaid estate recovery generally applies to the probate estate, and property passing by a transfer on death deed or lady bird deed passes outside probate. The rules are detailed, so ask before relying on this.

Talk to us before you sign a deed. Call (512) 737-8404 or book a free consultation.

Sources

• 26 U.S.C. § 1015 (basis of property acquired by gift)
• 26 U.S.C. § 1014 (basis of property acquired from a decedent)
• Texas Tax Code chapter 11 (homestead exemption)
• Texas Estates Code chapter 114 (transfer on death deeds)
• IRS: Frequently Asked Questions on Gift Taxes

Written by Turner Henington, attorney and former KPMG tax accountant, Henington Lewis Law Firm PLLC. This article is general information, not legal or tax advice for your situation.