14 Feb My sister and I inherited a home. What happens when I buy her out?

Q. My sister and I inherited a house in Bergen County. I want to buy my sister out. Do I have to pay estate tax, inheritance, tax income tax and capital gains? And if I ever sell, are there complications? Can I avoid probate court and still transfer it to my children someday? I have a will.
— Concerned

A. We’re glad to hear you have a will.

We’re also glad you’re planning ahead for the home that was inherited.

If you and your sister inherited the house from a parent, there would be no inheritance tax as children are Class A beneficiaries, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

If you inherited the house from another sibling, there would be an inheritance tax because a sibling is a Class C beneficiary, she said. Class C beneficiaries are only exempt for the first $25,000 inherited, she said.

“A bill has been introduced to the New Jersey legislature to exempt the transfer of real property to siblings at death from the inheritance tax because a sibling may not have the liquidity to pay the tax,” she said. “However, that bill is still pending.”

Romania said when property is inherited, the beneficiaries obtain the property with a cost basis equal to the date of death fair market value so that when he or she sells it, the only gain that is potentially taxable is the gain between the date of sale and the date of death.

If you are buying an interest in property that was inherited by a sibling, the sibling would be responsible for the tax on such a gain, she said.

Depending on the facts and circumstances, it is possible that there is no gain or that any gain is not taxable, for example if your sister was living in the home, she said.

Transfer of real estate may also require payment of a realty transfer fee, Romania said, though exceptions apply if the transfer is by an executor or administrator of a decedent “to a devisee or heir to effect distribution of the decedent’s estate in accordance with the provisions of the will or laws of intestacy.”

Ensuring that the deed to the home has been properly prepared, with the proper parties named and signing the deed, and then that the deed is recorded from the prior decedent to you and your sister — and then from your sister to you if you should buy out her share — is very important because many title issues are raised by families failing to record deeds or recording inaccurate deeds when property is transferred down to other family members, Romania said.

Once the property is recorded in your name, it will pass by your will as part of your residuary estate or as a specific bequest under your will, she said.

“You should not name your children on the deed unless you intend to make a gift of the property to them during your lifetime,” Romania said. “Transferring the property to your children during your lifetime may have significant consequences, for example with respect to Medicaid qualification or income tax, for you and your children, which is why it is recommended you consult with a qualified tax advisor before making such a transfer.”

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This story was originally published in February 2024.

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.