Taxes when a non-relative inherits a home


Q. I plan on leaving my house to a non-relative. What are the tax scenarios?
— Planning ahead

A. We’re glad you’re asking before it’s too late.

There are a few items to consider.

The federal estate and gift tax exemption amount is now $11.4 million, so most estates don’t pay the federal estate tax, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

Plus, New Jersey residents who die on or after Jan. 1, 2018 are no longer subject to a New Jersey estate tax, she said.

“Unfortunately transfers at death or gifts made within three years of death to individuals other than Class-A beneficiaries – spouse, civil union or domestic partner, parents, grandparents, descendants, stepchildren, mutually acknowledged child – do incur an inheritance tax unless it is of an exempt asset such as life insurance,” Romania said.

The transfer of the house to a non relative at your death will result in an inheritance tax assessed at a rate of 15 percent on the first $700,000 and 16 percent on any amount over $700,000 of the date of death value, she said.

She said if there is a mortgage on the house, the mortgage does not get paid off – unless you direct your executor to do so in your will – and your beneficiary takes the house subject to the mortgage.

“The inheritance tax will be assessed on the equity value transferred,” she said. “Your beneficiary will need to pay the inheritance tax from his or her other funds unless you also leave direction in your will that the tax be paid by your residuary estate.”

If your beneficiary later sells the house, the basis for computing gain for income tax purposes will be the value on your date of death plus any improvements your beneficiary makes to the house, Romania said.

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This story was originally published in March 2019. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.