| As a Certified Financial Planner, I'm | | | | Inheritances aren't subject to Federal |
| often asked about issues regarding | | | | Estate Tax unless the estate's value is |
| inheritance, gifting and the resulting | | | | over a certain amount, which is |
| taxes. Here's a classic example of just | | | | currently two million dollars. Because |
| how complicated these situations can be, | | | | all assets owned by the deceased are |
| using a question from a reader in | | | | included in the estate's valuation (i.e. |
| Michigan we'll call Bob. | | | | retirement accounts, annuities, life |
| Bob writes, "I have a question about my | | | | insurance, etc.), reaching that two |
| mom's home that I inherited. Before my | | | | million dollar limit is easier than you |
| mom died she put her real estate into | | | | think. |
| joint ownership between her and my | | | | Even if there is no gift or estate tax |
| sister. It was supposed to help make | | | | when the assets are transferred, there |
| settling her estate easier. Before mom | | | | can be capital gain taxes when the |
| passed away, my sister died. After my | | | | assets are sold. The trick is |
| sister died, mom placed the real estate | | | | determining the asset's original value, |
| jointly between herself and me. Mom | | | | or cost basis, and that depends on |
| passed away over a year ago and I am now | | | | whether the asset was a gift or an |
| contemplating the sale of her house. | | | | inheritance. |
| After mom's death I had the home | | | | When you receive a gift, you also |
| transferred to my and my wife's names. | | | | receive the cost basis the person giving |
| What are my capital gains liabilities on | | | | the gift had. So, if a parent paid |
| the sale of the house? Do I pay capital | | | | $10,000 for a home and it was worth |
| gains on the whole sale, half the sale, | | | | $100,000 when it was gifted to the |
| or none of the sale?" | | | | child, the child now has a cost basis of |
| Bob's lack of knowledge is nothing out | | | | $10,000. If the house is sold 5 years |
| of the ordinary. Few people are aware of | | | | later for $125,000, the child will owe |
| the tax implications and needlessly end | | | | taxes on a gain of $115,000. |
| up creating a tax headache for | | | | If the house was instead inherited by |
| themselves and their loved ones. | | | | the child, the cost basis is the value |
| Let's explain what an inheritance is and | | | | of the house at the time of inheritance, |
| how it differs from a gift. An | | | | which in our example would be $100,000. |
| inheritance is money, property, or | | | | So when the house is sold 5 years later |
| another asset of value that is | | | | for $125,000, the child only owes taxes |
| transferred after death. A gift occurs | | | | on the gain of $25,000. In tax parlance, |
| when money, property or other assets are | | | | the house received a step-up in basis |
| transferred before death. An inheritance | | | | when transferred after death. It doesn't |
| and a gift are handled very differently | | | | receive a step-up if transferred prior |
| from a tax standpoint. | | | | to death. |
| Each of us can give gifts up to $12,000 | | | | Let's apply this to Bob's situation. |
| per year to any person we want without | | | | When Mom added Sister's name to the |
| any Federal tax implications. (There may | | | | deed, it was a gift to the sister of 50% |
| be some state gift tax implications so | | | | of the value of the home and Sister's |
| check with an accountant.) | | | | cost basis was 50% of Mom's cost basis. |