Specific planning is required to pass your house without taxes.
You are a homeowner.
This is one asset you plan to pass along to your heirs.
You know the current estate tax exemption threshold is $11.58 million for a single individual in 2020.
Your estate will be taxed on any amount above this threshold.
If you live in a state with estate taxes (i.e., not Kansas or Missouri), then the state exemption threshold may be lower.
If your estate falls below these thresholds, it can pass free of estate taxes.
According to a recent savingadvice.com article titled “Use These Tips to Pass Your House to Your Heirs Tax-Free,” avoiding estate taxes does not mean your estate will pass without taxes.
Some states have an inheritance tax levied on those who inherit based on their degree of kinship to the decedent.
Real estate brings another tax element to consider.
You may trigger capital gains taxes when you pass your house.
What options do you have for passing your home?
Is your home worth more than $11.58 million?
Does the value of your home take your estate value above the exemption threshold?
If yes, you should work consider placing your home into an irrevocable trust.
Start by asking your estate planning attorney about a qualified personal residence trust.
What will happen?
After you die, the house will pass to the heirs you named in the trust at a discounted value.
If you sell the house instead, the money will enter the trust and will not be able to be cashed out.
This solution is especially useful for high-value estates.
As a Gift.
If your home is valued at less than $11.58 million, you could gift the home to your heirs.
You will need to file a Form 709 Gift Tax Return with your annual taxes.
This move allows you to make this gift without paying out-of-pocket taxes.
It simply reduces the amount you may transfer estate tax free at your death or in the form of future gifts exceeding the annual gift exclusion of $15,000 per donee per year.
You will need to consider the total value of your home and estate when considering a gift of your home.
You can offset the value of the gift by first using the annual gift tax exclusion of $15,000.
Because the exclusion applies per donor and per donee, you may be able to leverage the exclusion amount for your spouse and yourself if you own property jointly and have multiple children.
If you must apply for Medicaid, you will need to gift the property more than five years before applying for Medicaid benefits.
Fail to do this and you may incur a huge period of ineligibility.
Be sure to consult with an elder law attorney, as the rules for Medicaid eligibility require special knowledge, training, and experience.
For example, elder law is not in my “strike zone” as an estate planning attorney.
Sell the Home and Gift the Money
Instead of passing your house to your children, you could sell the home and gift the money to your children through a trust or under a last will and testament.
You could also sell your home to your children at a reduced price.
They can later sell the home at a higher value later.
Your children may end up paying higher taxes later, if the sales price to a third party was higher than their purchase price from you.
First, the difference between the intra-family sales price and its fair market value is considered a gift and gift tax rules will apply.
Later, when the home is sold to a third party at fair market value, the entire difference must be reported as a capital gain.
Alternatively, consider selling the home at fair market value to your children in down payments through a seller-financed sale.
You will carry the note and the children will make affordable payments.
You can also offset the sale by gifting up to $15,000 each year to avoid triggering estate taxes.
Because the home when sold is not a part of your estate, it will not trigger estate taxes.
Before making any choices, you should discuss your goals and options with an experienced estate planning attorney.
This can get complicated.
Reference: savingadvice.com (July 29, 2020) “Use These Tips to Pass Your House to Your Heirs Tax-Free”