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