23 Jul Should I gift my home to my kids or let them inherit?
Q. I purchased my home in 1976 for a little more than $58,000. I have been told that I could most likely get $500,000 for it if I were to sell it now. I don’t plan to sell, but my children are the beneficiaries of my estate in my will. They will, most likely, sell the house after I die, so where will they stand as far as capital gains tax? Is there something I should do now rather than have the house just go to them in my will?
A. Here’s what you should consider.
When you sell your primary residence that you have lived in at least two out of the last five years, you are permitted to exclude $250,000 of the gain ($500,000 for a married couple) from your income, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
She said the gain is calculated by taking the sales price less the selling expenses and deducting the cost of the home plus the cost of improvements.
“It appears in your case, based on the figures provided that unless you are married, you may incur some gain on the sale of your home if you should sell it,” Romania said.
Here’s what would happen if your children inherit the home.
Property owned or controlled by a decedent upon death receives a step-up in basis to the decedent’s date of death value.
“Therefore, if property is sold immediately after a decedent’s death, there is generally no gain realized by the estate or beneficiaries because the sales price is approximately equal to the basis – date of death value,” she said.
But gifting can cause other issues.
Romania said if you were to gift the property to your children during your lifetime, they would take the property at your basis and unless they lived in the home, they would not be eligible for the $250,000/$500,000 exclusion upon sale of the home.
“Thus your beneficiaries are better off from an income tax perspective receiving the property upon your death rather than receiving the property as a gift during your life,” she said.
Also keep in mind that if you gifted the home during your lifetime and later applied for Medicaid, you could face eligibility issues if it happens within five years.
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This story was originally published on July 23, 2019.
NJMoneyHelp.com 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.