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