Regifting a house could cut a six-figure capital-gains bill

Transferring a gifted property back to its original donor can reset the capital-gains basis at the donor's death, potentially erasing a mid-six-figure tax bill — but the maneuver hinges on a one-year survival rule and the $15 million lifetime exemption.

"By gifting you the house, you received your mother's tax basis rather than a step-up to its fair market value," Quentin Fottrell, personal finance columnist at MarketWatch, wrote in response to the reader's question.

The reader's annual maintenance runs $20,000 to $25,000, and a sale could trigger capital gains in the mid-six figures. In the column's example, a home with a $200,000 adjusted basis sold for $800,000 would generate gain on the original basis, not the current value. The original gift and the "regifting" are treated as two separate transactions for tax purposes, Fottrell noted.

If the transfer is executed correctly and the mother survives more than one year, the property could pass through her estate with a stepped-up basis, wiping out the gain entirely. But a death within a year would forfeit the benefit under Section 1014(e) of the U.S. tax code, which blocks a step-up when property returns to the original donor within 12 months.

The one-year rule and the home-sale exclusion

Section 1014(e) is the central risk. If the mother dies within a year of receiving the property back, the step-up is denied and the transfer accomplishes nothing tax-wise. The column notes that a gift made in 2016 and returned in 2026 is not automatically disqualified — the 10-year gap alone does not prevent a future step-up — but the one-year survival window after the transfer is what matters.

There is also a fallback that requires no transfer at all. If the reader has lived in the home for at least two of the five years before selling, she may qualify for the federal home-sale exclusion, which shelters up to $250,000 of gain, or $500,000 for married couples filing jointly. A special rule lets a surviving spouse use the $500,000 exclusion for a sale within two years of the spouse's death, provided all requirements are met.

Gift tax, Medicaid, and the estate plan

Transferring the property back is treated as a gift for federal gift-tax purposes, but it does not create capital gains because no sale occurs. In 2026, the lifetime federal estate and gift tax exemption stands at $15 million per person, so a taxable gift draws down the donor's available exemption rather than triggering out-of-pocket tax; the donor files IRS Form 709 if required. The reader should confirm she has not already used her exemption.

The column flags two further complications. A transfer to an elderly parent could affect Medicaid eligibility or estate recovery, depending on the mother's circumstances. And if the reader has siblings, an estate-planning attorney should review the mother's estate plan to ensure the property passes back as intended rather than relying on a promise.

Given the property's value and the mother's age, Fottrell advised hiring an estate-planning attorney and a CPA before transferring the property. "If done right, it could save you a packet," he wrote.

This article is for informational purposes only and does not constitute investment, tax, or legal advice.