Many people are under the false assumption that when they pass their loved ones will receive a large tax bill in the mail. This doesn’t have to be the case. To avoid probate many will gift their real property directly to their loved ones. There are reasons why you may not want to directly give the property ought right to your loved ones. If you gift the property outright, you lose full control over the property; you can no longer make decisions for the property. The person who receives the property can sell, mortgage, or rent the property without your consent. Another thing to consider is the tax ramifications of gifting property.
If you gift your property to your loved ones outright, prior to your passing, your loved ones will receive what is called a Gift Basis in the property. The Gift basis will be the same basis that you have on the property. For example, If you bought a house for $100,000 then your basis on the property will be $100,000. This will mean that if you later sold the property for $400,000, you will have to pay tax on the difference of the selling price and your basis. In this example this will mean that there will be $300,000 worth of gain ( $400,000 sales price – $100,000 basis = $300,000 in gain). When you gift your property to a loved one then they receive that same basis in the property. If they later sell the property, they will receive the same basis in the property.
If you leave your property to your loved ones as a result of a death event, they will receive what is called a step-up in basis. If the property is left via a will; a trust; a deed with survivorship rights; or a Lady Bird deed, then the property will receive a step-up in basis tax treatment. When a property receives this treatment, the basis becomes the fair market value of the property at the date of your death. For example, if you bought the property at $200,000 your basis is $200,000. If the property appreciates in value to $500,000 then your basis will remain at 200,000. When you pass and you leave your property to loved ones via one of the methods listed above; their basis becomes whatever the fair market value was at the time of your death, in this example $500,000. So when your loved ones sell the property immediately; then under this example, they would not pay tax ( $500,000 sells price – $500,000 their new step-up in basis = $0 in gain).
By taking the right steps now you can ensure that your loved ones receive the best tax treatment for the legacy that you leave to them. We would be glad to talk to you about this or any other estate planning needs that you might have. Please feel free to contact us today to schedule your free consultation.
Eric Baker
Estate Planning & Elder Law Attorney
