Selling the House Before a Florida Medicaid Application: What Really Happens to the Money

Beverly's Dilemma: Keep the House or Sell It

Beverly is 85, lives alone in her $320,000 home in South Daytona, and her health has declined to the point where her children are looking seriously at nursing home care. She hasn't applied for Medicaid yet. Her three adult children, wanting to "simplify things" for everyone, are leaning toward listing the house now, before any application goes in. (Beverly is a composite I use to illustrate this planning question, not an actual client, but her situation reflects one I see constantly in my practice.)

Here is the first fork in the road, and it matters more than most families realize. As long as Beverly lives in the home, or intends to return to it, Florida and federal Medicaid rules treat the house as a non-countable, exempt asset for eligibility purposes, regardless of its market value in most cases involving intent to return. The moment that home is sold, though, the equity that was invisible to Medicaid becomes cash sitting in a bank account, and cash is about as countable as an asset gets.

So the real question for Beverly's family isn't really "sell or don't sell" in the abstract. It's: what problem are we actually trying to solve by selling, and is there a better tool for that problem?

Path One: Keep the Exempt Home

If Beverly's family does nothing, the home stays in her name, stays exempt while she's in the home or intends to return to it, and Medicaid eligibility for her nursing home care can proceed based on her other, more modest assets and income. The tradeoff is what happens after death.

Florida's homestead protection is genuinely strong. Under Article X, Section 4 of the Florida Constitution, homestead property generally passes outside of probate to constitutional heirs, and Florida's Medicaid Estate Recovery Program cannot enforce a claim against property that qualifies as protected homestead. In plain terms: if the house stays in Beverly's name, stays her homestead, and passes to her children the right way at her death, there is often nothing for the state to recover against.

The catch is the phrase "the right way." If Beverly's will simply directs her personal representative to sell the house and distribute the proceeds, that instruction pulls the house into the probate estate as cash, and cash inside a probate estate is exactly what Medicaid's recovery claim can reach. The exemption that protected the home in life can disappear at death if the estate plan isn't built with recovery in mind.

Path Two: Sell the Home, Then What?

Suppose Beverly's family does sell. The $320,000 house becomes roughly $320,000 in liquid proceeds (less closing costs), and now Medicaid's asset limit, a very small number compared to that sum, applies. Beverly cannot simply hold that money and still qualify. From here, there are really four paths for the proceeds:

• Spend down on exempt items. Proceeds can go toward another home if Beverly intends to keep living independently, toward paying off debts, prepaying funeral and burial arrangements, replacing a vehicle, or covering current medical and long-term care costs. These conversions turn countable cash back into exempt or spent resources legitimately.
• A Medicaid-compliant annuity. For a portion of the proceeds, an irrevocable annuity meeting strict Medicaid rules can convert a lump sum into an income stream, which is treated differently than a countable asset.
• A trust. Certain trusts, including special needs or pooled trusts depending on Beverly's circumstances, can hold funds without disqualifying her, though these have their own strict requirements.
• A gift to the children. This is the option that causes the most trouble. Any gift within the five-year lookback period creates a penalty period of Medicaid ineligibility, calculated based on the amount given away. Families sometimes don't realize the gift itself is the problem, not just the timing of the application.

Whatever path is chosen, the sale has to be reported promptly as a change in circumstances, and the proceeds generally need to be spent down or protected within a fairly narrow window, often by the end of the following month, or eligibility can be delayed.

Capital Gains: The Tax Question Nobody Should Skip

Separate from Medicaid eligibility entirely, selling Beverly's home triggers a federal capital gains question. If the home was her primary residence, she may be able to exclude a substantial amount of gain (up to $250,000 for a single filer) from federal capital gains tax. That exclusion is a tax rule, though, and it does nothing to shield the sale proceeds from being counted as an asset for Medicaid purposes. Families sometimes assume that because a sale is tax-free, it's also Medicaid-neutral. It isn't. Two entirely different systems are evaluating the same transaction for entirely different reasons.

The Lady Bird Deed Alternative

This is often where I steer families like Beverly's. A lady bird deed, sometimes called an enhanced life estate deed, lets Beverly keep full control of the home during her life, including the right to sell it or change her mind, while automatically passing it to her children at death without going through probate. Because the transfer happens outside probate, and because Beverly retains her interest until death (not a completed gift today), it generally avoids both the five-year lookback penalty and Medicaid estate recovery, since recovery reaches only probate assets.

It is not automatically the right tool for every family. It depends on how the deed is drafted, what other assets exist, and what Beverly's children want to do with the property long-term. But for a family whose only goal is simplifying an estate, not converting equity into spendable cash, it often accomplishes what selling was meant to do, without creating a countable-asset problem.

What Beverly's Family Chose

After sitting down with an elder law attorney, Beverly's children realized their real goal wasn't a sale at all. They didn't need cash today; they wanted to avoid a messy probate later and make sure Beverly could still get help paying for nursing home care if it came to that. A straight sale would have handed them a tax-free profit on paper but an immediate, urgent Medicaid spend-down problem in practice.

Instead, the family used a lady bird deed to keep the South Daytona home titled in Beverly's name, protected as her homestead, with the property passing directly to her three children at her death. Beverly retained the right to live there, sell it herself, or change her mind at any time. When she eventually needed nursing home care, the home remained an exempt asset for her Medicaid application, her other assets were reviewed on their own terms, and her family had no probate sale, no five-year lookback exposure from a gift, and no estate recovery claim to worry about against the house itself.

Sources

• Florida Senate, Chapter 409 Section 9101, Florida Statutes (Medicaid Estate Recovery Act)
• Florida Constitution, Article X, Section 4 (Homestead Exemptions)

This article is for general informational purposes only and does not constitute legal advice, nor does reading it create an attorney-client relationship. Florida estate, elder, probate, and real estate law are fact-specific and change over time. Consult a licensed Florida attorney about your individual circumstances. Arthur Simpson, Esq. is licensed to practice law in the State of Florida. Attorney advertising.