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Real estate inheritance tax tips

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POSTED August 9, 2013 6:21 p.m.

DEAR BENNY: I am a retired widow who owns two homes. I have two children. Is it possible for each one to be a co-owner with me: one child on one house and the other on the second property? How would I go about doing this? Would that save anything on taxes, etc., for my two adult children? Would it cost me anything other than the filing fee for the property ownership papers of each of the homes?

My estate isn’t huge, but the inheritance taxes would take up quite a bit of money. They would each naturally inherit the homes, but doing it the way I propose would give me the power to will a specific home to each child with no arguments over any value difference. --Evelyn

DEAR EVELYN: I get this question all too often, and my standard response is that there may be serious tax consequences when a parent adds his or her children to title on a house.

Let’s say you bought the property for $50,000 and it is now worth $300,000. Your basis for tax purposes (a number that is important in determining capital gains tax) is $50,000. If you give half of the property to one of your children, his or her basis will be $25,000.

The basis of the person giving the gift (donor) becomes the basis of the gift receiver (donee). If you die, and the house is then worth $300,000, and assuming no improvements were made (and ignoring selling costs such as real estate commissions), the tax basis of your child will be $175,000.

How do I get this number? On your death, your child gets a stepped-up basis as of the date of death. Supposing you die when the house is worth $300,000, and since you own half of the house in my example, your child gets a stepped-up basis in the amount of $150,000. But your child also has a basis of $25,000; thus $175,000.

If the house is sold for $300,000, your child will have made a profit of $125,000 and will have to pay capital gains tax. At the current 15 percent federal tax rate, that means a payment of $18,750. Additionally, your state or local government may also impose a capital gains tax.

But if you die, and your children inherit the house, they get the full stepped-up basis. In our example, if the property is worth $300,000 on your death, their tax basis is $300,000. If they sell for that price, they have made no profit and thus have to pay no tax.

You are concerned about your children arguing about value. Quite frankly, they should each be happy that you are giving them anything. Parents do not legally have to give things to their children; they can spend all of their kids’ inheritance.

You can prepare a last will and testament giving one house to each of your two children. If there are dramatic differences in valuation -- and if you want to treat your kids more or less equally -- you can adjust your will so that more money, or more furniture, etc., goes to the child who will inherit the less expensive house.

DEAR BENNY: My partner died and he had put the house in a trust. I have lived in the house for 24 years and paid the mortgages for two years after he died. The trustee hates me, and he is in France most months. I am the sole beneficiary of my partner’s will, which includes everything. How can I get this through probate? Can I fire the trustee? The decedent also owes $30,000 in credit card bills. The trustee does not even return my phone calls. --Paul

DEAR PAUL: I can’t give you any good answer, because the laws differ from state to state. However, if the real property is in a trust then its disposition is governed by the terms and conditions contained in that document.

You say that you were the beneficiary of the will. Are you also the beneficiary of the trust? That will be an important factor that the probate court will be considering when making its decision.

Bottom line: You need to obtain a copy of the trust agreement to determine what your rights are, and to see what can be done to either enforce your rights with the current trustee or to have that trustee removed. If those provisions are not contained in the trust document (they should be if it was prepared properly) your state law will dictate.

You can also file to probate the estate if there are any probate assets. As mentioned earlier, there is a distinction between a will and a trust. Currently, the property is probably outside of the decedent’s estate, which is one reason why people create trusts.

However, when someone owns a revocable trust, the will simply “pours over” the probate assets into the trust. This is highly complex and you really should get yourself a lawyer who understands probate and trust law.

DEAR BENNY: I have been a student of retirement living since 1962, when I was an executive with one of the major developers of active retirement communities.

Among my findings:

1. There are hundreds of thousands of Americans living today in over-55 retirement communities. Very few of them are currently in financial trouble. About 30 percent of them paid cash for their houses. Many others have only very small mortgages. Practically none had subprime mortgages, and few have negative amortization. Foreclosures are minimal.

2. About the only financial problem is that many seniors are “brick rich and cash poor.” I ran across one case years ago where an elderly widow had such a small income that she could not pay the $2 donation for Meals on Wheels. But her $400,000 house was free and clear.

If reverse mortgages had been in existence then, it would certainly not have been a last resort. Godsend would be more like it. She could have lived like a queen (albeit a modest one) for the rest of her life, tax-free.

3. Lump-sum payments, I agree, may create real problems and should be a last resort. But I see a real advantage to many seniors in the way monthly payments are structured under the Federal Housing Administration program. They are based on average actuarial tables for life expectancy at a given age.

That means that some of us are going to die short of our life expectancy and some of us are going to outlive our life expectancy. The “early diers” are not disadvantaged because they have not used up much of their house’s equity. The “outlivers” reap a bonanza because their monthly payments are received as long as they live, even after their house’s equity is used up. This is guaranteed by the FHA’s mortgage insurance pool we contribute to monthly. This can go on for a long, long time.

My next-door neighbor, for instance, is 96, and she is not at all unique in our community. Had she taken out a reverse mortgage at age 65 she would have received 372 monthly payments by now (and counting). Talk about a win-win. --Kelly

DEAR KELLY: I still am a strong believer that a reverse mortgage should be considered a last resort. However, new laws and a new FHA product are slowly changing my mind.

You used the concept “brick rich and cash poor.” My terminology is “house rich and cash poor” (although I like your phrasing better). I have had too many clients over the years who were in this category.

But the upfront costs of a reverse mortgage could not compete with a home equity line of credit (HELOC), where you had to pay interest only when you tapped into that line. It basically gave you a checkbook to keep in your desk drawer until you needed the money.

However, last year Congress increased the loan limits on reverse mortgages to $625,000. Additionally, FHA announced a new version of the old reverse mortgage, which they call the HECM Saver (home equity conversion mortgage). Although this new product does not allow homeowners to take as much money under the program as with the older version, the upfront closing costs are considerably lower.

If you are age 62 or older and have a house that is “free and clear” (or only has a small mortgage), you may be a candidate for this HECM Saver program. Do your homework and consult with your financial, tax and legal advisers before you make the final decision.


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