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Children’s tax liability on home changes after death of parent

Dear Benny: I am a retired widow who owns two homes. I have two children.

Is it possible for each one to be a co-owner with me: one child on one house and the other on the second property?

How would I go about doing this? Would that save anything on taxes, etc., for my two adult children? Would it cost me anything other than the filing fee for the property ownership papers of each of the homes?

My estate isn’t huge, but the inheritance taxes would take up quite a bit of money. They would each naturally inherit the homes, but doing it the way I propose would give me the power to will a specific home to each child with no arguments over any value difference. –Evelyn

Dear Evelyn: I get this question all too often, and my standard response is that there may be serious tax consequences when a parent adds his or her children to title on a house.

Let’s say you bought the property for $50,000 and it is now worth $300,000. Your basis for tax purposes (a number that is important in determining capital gains tax) is $50,000.

If you give half of the property to one of your children, his or her basis will be $25,000. The basis of the person giving the gift (donor) becomes the basis of the gift receiver (donee). If you die, and the house is then worth $300,000, and assuming no improvements were made and ignoring selling costs such as real estate commissions, the tax basis of your child will be $175,000.

How do I get this number? On your death, your child gets a stepped-up basis as of the date of death. Supposing you die when the house is worth $300,000, and since you own half of the house in my example, your child gets a stepped-up basis in the amount of $150,000. But your child also has a basis of $25,000; thus $175,000.

If the house is sold for $300,000, your child will have made a profit of $125,000 and will have to pay capital gains tax. At the current 15 percent federal tax rate, that means a payment of $18,750.

Additionally, your state or local government may also impose a capital gains tax.

But if you die, and your children inherit the house, they get the full stepped-up basis. In our example, if the property is worth $300,000 on your death, their tax basis is $300,000. If they sell for that price, they have made no profit and thus have to pay no tax.

You are concerned about your children arguing about value. Quite frankly, they should each be happy that you are giving them anything.

Parents do not legally have to give things to their children. They can spend all of their inheritance.

You should prepare a last will and testament, giving one house to each of your two children. If there are dramatic differences in valuation – and if you want to treat your kids more or less equally – you can adjust your will so that more money, or more furniture, etc., goes to the child who will inherit the less expensive house.

Dear Benny: Your comments in a recent column to an elderly person seeking advice on possibly renting were unfair. Suggesting to this person that he or she watch “Pacific Heights” is like telling someone interested in country life to first see “The Amityville Horror.” Painting such a gloomy picture is as wrong as saying renting leads to the road of riches.

There are pitfalls to renting, as you suggest, but there also many benefits. An elder could get help from a trusted family member, attorney or friend in screening applicants and learning the ins and outs of renting. Some older people might appreciate the companionship of a renter.

Although renting is not for everybody, someone who does his or her due diligence may find it very rewarding. I wouldn’t recommend that my 80-year-old mother rent her house, but I do know seniors who have been successful landlords.

We have been landlords for years and have never had anything remotely close to a “Pacific Heights” experience. I am sure you were looking out for the best interests of the elderly, but a more balanced column would have been more helpful. -Steve

Dear Steve: I accept your criticism, and perhaps I was a little too harsh in my response. But as you point out, renting is not for everyone, and sometimes one has to point out the extreme risks in order to get the point across.

As always, I welcome comments and suggestions from my readers — positive or negative.

Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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