Home owners must decide how to distribute this valuable asset.
Owning and maintaining a house takes work.
A lot of it.
You are responsible for the lawn and garden, protection from pests, and general upkeep.
Despite these added pressures, there are many perks.
By owning a house, you can truly make it a “home” without restrictions from your landlord.
However, make sure you comply with the rules and regs of your HOA!
Your house is also a significant asset.
According to a recent The Washington Post article titled “Don’t put your kids on the title of your home. There’s a better way for them to inherit the property,” small and large assets should be included in your estate planning.
Although some assets are simple to divide and distribute, the family home is not one of these.
Some parents may be tempted to either purchase a new home under their name and the name of an adult child or simply add the adult child to an existing title.
This can lead to unintended tax consequences.
If only the parents owned the house, they could exclude the first $500,000 of sale profits from federal income taxes.
If only one parent is alive, as the sole owner he or she would save the first $250,000 of sale profits from federal income taxes.
This only works if the child is not on the title.
Another problem involves capital gains taxes.
If a home is purchased for $100,000 and increases in value to $500,000 at the death of the owner, then the property receives a step-up in basis from the IRS.
The IRS will count the home as being valued at $500,000.
The heir will then be able to sell the home shortly after the death of the parent and owe no capital gains taxes, assuming no increase in value during that brief period.
What happens if the child is included on the house title?
The IRS will only give a step-up in basis to the half owned by the parent.
Because the house increased in value by $400,000, the heir will pay capital gains taxes on his or her half of the profit.
The heir will owe taxes on $200,00 rather than inheriting a tax-free asset.
Because estate planning around real estate has nuanced rules, working with an experienced estate planning attorney to pass the family home to heirs is essential.
Reference: The Washington Post (Oct. 20, 2021) “Don’t put your kids on the title of your home. There’s a better way for them to inherit the property.”