13 Aug Is it smarter for taxes to buy my mom’s home or inherit it?
Q. My mother purchased her house in Jersey City for $100,000 and it’s now worth $450,000 but it needs $100,000 of work. I am trying to decide if I should purchase the home from her for $350,000 or if I should wait to inherit the house. It has a $100,000 mortgage.
— Buy vs. inherit
A. There are several items to consider here.
First, there are two income tax benefits to home ownership.
Real estate taxes are deductible as an itemized deduction, subject to the $10,000 cap on real estate, state income taxes and sales tax, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
The other benefit is you can deduct mortgage interest. In order to deduct these deductions, you must own the property, Kiely said.
If you purchased the home for $450,000 and your mother pays off her $100,000 loan, she would have a $350,000 gain on the house, she’d have to pay federal capital gains tax plus New Jersey income tax on $100,000.
“The first $250,000 is tax free, but any amount over that is taxable,” Kiely said. “Paying the tax might be worth it because the house and all the expenses would be yours. This would help her monthly cash flow.”
If you simply move in and pay for the repairs you would not have any immediate tax benefits, but you would be greatly helping out your mother, Kiely said. When she eventually passes, you would inherit the house and all the bills.
Note that if you inherit the property instead of purchase it, you would get a step-up in basis to the fair market value on either the date of death or six months from the date of death.
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This story was originally published on Aug. 13, 2020.
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