If you need long-term care and are hoping Medicaid will pay for it, you may be thinking about giving the family home to your kids or selling it to relatives for less than market value. Here’s what you should know before downsizing to long-term care.

Determine the best long-term care choice.

Regardless of what you do with your home, the first step is to decide where you should live. The level of care you will require is the determining factor, as are any future care needs. For example, if you only need a moderate level of care throughout the day, and for the foreseeable future, assisted living can be the right choice. These communities offer a healthy balance of independence and assistance.

If, however, you have a chronic health condition that is likely to worsen, skilled care will be the optimal choice. Nursing home communities provide round-the-clock care for residents who need more medical assistance than what’s offered in assisted living.

Should you gift your family home when downsizing to long-term care?

It’s a common strategy for seniors to “spend down” their assets in order to qualify for Medicaid. While primary residences typically aren’t countable assets for Medicaid consideration, many seniors fear their home will be repossessed to compensate Medicaid after they die. As AARP explains, the Medicaid Estate Recovery Program can seek repayment from a beneficiary’s estate; however, giving away your home to avoid estate recovery is likely to do more harm than good.

Whether a senior adds a family member as a joint tenant with right of survivorship, gifts the home directly, or sells it for under market value, it’s considered a gift. When seniors make substantial gifts during the five years prior to applying for Medicaid, it triggers a penalty period that makes the senior ineligible for Medicaid until the penalty is satisfied.

Gifting a home also has tax implications for the recipient. A home’s tax basis is only stepped up when it’s sold or inherited, not gifted. That means if your heirs sell, they’ll owe capital gains tax on all appreciation since you originally purchased the home. Your heirs could end up with a tax bill if your home has appreciated significantly after two years.

Should you sell your home when downsizing to long-term care?

Selling is another option. A home sale can generate funds to cover several years of assisted living depending on how much equity you have. First and foremost, if you’re selling your home, it’s crucial that you work with a dedicated and experienced realtor like Hana Hyams. It’s also helpful to learn about your local housing market. Real estate market data will tell you how long you can expect your home to be on the market and whether it’s likely to sell for above or below your asking price. Having this sort of information gives you a ballpark idea of how much the sale could help you cover expenses at your new home.

Should you keep your home when downsizing to long-term care?

Is your heart set on keeping the house in the family? While it takes more effort, it is possible to hold onto your home without incurring Medicaid penalties or steep tax bills. Elder Law Answers explains that certain transfers won’t trigger a Medicaid penalty, such as transferring ownership to a spouse who is not applying for Medicaid, a disabled or minor child, or a family caregiver who has lived in the home for at least two years.

It’s also possible to use your home as a source of income so you can afford long-term care without Medicaid assistance. Renting out the home may generate enough income to cover the gap in long-term care costs and allow you to keep your home. You can also refinance to lower your monthly mortgage payment. For instance, an FHA streamline refinance is ideal for homeowners with existing FHA mortgages, as it’s simpler and faster to apply for than standard refinance programs.

Your situation is a complex one. Whether you want to keep your home or sell it, it’s wise to talk to an elder law attorney before making major financial decisions. What you do with your home has implications for Medicaid eligibility and your estate, and seeking professional advice is the best way to avoid making a costly mistake.

Real estate expert Hana Hyams has the tenacity and savvy to help you sell or buy a home. Reach out today to find out more!

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Rhonda Underhill // contributor