To Gift, or Not To Gift
Considers gifting real estate to a loved one? If so, it is important to consider the tax implications.
The higher the cost basis for a piece of real estate, the lower the potential capital gain (and taxes) when that asset is sold. When someone dies, and again six months later, the executor of the estate values all the property in the estate and chooses whichever valuation dates result in the least possible tax consequences. The cost basis for the heir (s) of a property will be the fair market value on the chosen valuation date. This is called "stepped-up basis. Inherited property should be appraised shortly after title is changed, to establish the new stepped-up basis. If you inherited property but have no evidence of your stepped-up basis, hire an experienced licensed appraiser to appraise the property's fair market value as of the date you received title. Such an appraisal is well worth the cost, because establishing a stepped-up basis allows you to minimize further capital gains taxes when you decide to sell or trade the property.
Federal Estate Tax Exemptions for decedents dying in:
2004: $1.5 million
2005: $1.5 million
2006: $2 million
2007: $2 million
2008: $2 million
2009: $3.5 million
2010: unlimited
2011: $1 million
In a gift situation, however, the recipient's cost basis is the same as the donor's cost basis. If your home was purchased ten years ago for $100,000, that cost basis would be passed from you to the recipient of your generous gift. Unless they are a charity, they would have to pay the same capital gains tax on the appreciated value of the property that you would, were you to sell it. Another possible issue is that most states have laws that prohibit people from receiving state aid if they have given away assets that could have been used for things like medical expenses or nursing homes; judges can unwind financial transfers of assets that occurred within three to five years of a request for state aid.
Savvy homeowners can deed title into a revocable living trust. When the principal or trustor dies, the living-trust becomes irrevocable and its assets are distributed. Probate cost and delays are avoided, and the new owner receives a stepped-up basis of market value as the date of the decedent's death.
If the total net estate exceeds the allowable federal estate tax exemption (see above chart), the estate pays any federal estate tax due before title is transferred to the heir(s); assets left to a surviving spouse are free of federal estate tax under the marital exemption, regardless of total estate value.
If you are gong to keep your property of the rest of your life and pass it on to your children as an inheritance, there's really nothing you need to do right now. Eventually, though, someone will have to pay the tax on the gains. the best strategy is to sit down with a tax professional who can help you explore the tax consequences of your various options, and choose the most profitable path.
Please no NOT act of the information contained in this article without talking to a qualified tax professional or estate planner! Please DO call for a referral to a qualified tax professional or appraiser, or with any comments or questions about this article.
Considers gifting real estate to a loved one? If so, it is important to consider the tax implications.
The higher the cost basis for a piece of real estate, the lower the potential capital gain (and taxes) when that asset is sold. When someone dies, and again six months later, the executor of the estate values all the property in the estate and chooses whichever valuation dates result in the least possible tax consequences. The cost basis for the heir (s) of a property will be the fair market value on the chosen valuation date. This is called "stepped-up basis. Inherited property should be appraised shortly after title is changed, to establish the new stepped-up basis. If you inherited property but have no evidence of your stepped-up basis, hire an experienced licensed appraiser to appraise the property's fair market value as of the date you received title. Such an appraisal is well worth the cost, because establishing a stepped-up basis allows you to minimize further capital gains taxes when you decide to sell or trade the property.
Federal Estate Tax Exemptions for decedents dying in:
2004: $1.5 million
2005: $1.5 million
2006: $2 million
2007: $2 million
2008: $2 million
2009: $3.5 million
2010: unlimited
2011: $1 million
In a gift situation, however, the recipient's cost basis is the same as the donor's cost basis. If your home was purchased ten years ago for $100,000, that cost basis would be passed from you to the recipient of your generous gift. Unless they are a charity, they would have to pay the same capital gains tax on the appreciated value of the property that you would, were you to sell it. Another possible issue is that most states have laws that prohibit people from receiving state aid if they have given away assets that could have been used for things like medical expenses or nursing homes; judges can unwind financial transfers of assets that occurred within three to five years of a request for state aid.
Savvy homeowners can deed title into a revocable living trust. When the principal or trustor dies, the living-trust becomes irrevocable and its assets are distributed. Probate cost and delays are avoided, and the new owner receives a stepped-up basis of market value as the date of the decedent's death.
If the total net estate exceeds the allowable federal estate tax exemption (see above chart), the estate pays any federal estate tax due before title is transferred to the heir(s); assets left to a surviving spouse are free of federal estate tax under the marital exemption, regardless of total estate value.
If you are gong to keep your property of the rest of your life and pass it on to your children as an inheritance, there's really nothing you need to do right now. Eventually, though, someone will have to pay the tax on the gains. the best strategy is to sit down with a tax professional who can help you explore the tax consequences of your various options, and choose the most profitable path.
Please no NOT act of the information contained in this article without talking to a qualified tax professional or estate planner! Please DO call for a referral to a qualified tax professional or appraiser, or with any comments or questions about this article.
