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