How avoid son having to pay whopping inheritance taxes on real estate?

Question

When we bought our home I put my son's name on the deed to avoid his having to pay whopping inheritance taxes. In the event of my inevitable demise, he is already on title and just assumes full rather than partial ownership of the property.

Now somebody tells me that this will actually cause legal confusion & result in his paying whopping capital gains taxes upon our demise when he sells the real estate, and that it's better to leave it as part of the estate for him to inherit and dispose of. Which is true?

Answer 1

Estate planning is a complicated area that requires a firm understanding of many factors related to you and your finances. It may be in your best interests to consult either a CPA who has significant experience in estate planning or an estate attorney.

With that bing said, here are some general factors to consider.

Will your estate be taxed?

Many average taxpayers will not be subject to the estate tax anyway. Currently the applicable exclusion amount is $2,000,000. So if you die in 2007 and ALL of your assets are valued less than $2,000,000 you do not have to worry about the Estate tax.

When you die, your son would get a "stepped up" basis allowing him to sell the property tax free (assuming he sold it for the value it was appraised for on your date of death)

However, there may be other reasons to transfer ownership of your home to your son beyond estate tax (some people try to shield assets from nursing homes in this way).

It seems that you have already transferred your home to your son, so lets deal with that.

I am assuming that your son did not pay you for your home, therefore his basis is zero. So when he goes to sell it, he will pay capital gains tax on the entire selling price less selling expense.

He may be able to get around this by making your home his permanent residence after you die and exclude a portion of the gain under Section 121 (However he would have to reside in the home for at least 2 years).

As you can see there are many factors to consider, that is why I would encourage you to seek someone familiar with the the laws as well as your circumstances to give you the best direction.

Answer 2

It depends on how big your total estate is. Unless it's larger than a couple million, he won't pay federal inheritance tax. Possible state tax depends on where you live.

If he inherits the property, his basis would be its value as of the time of your demise. If he doesn't inherit it but just has it gifed to him while you're still around, your basis becomes his basis. So the difference is based on how much it has appreciated between the time you bought it and your demise - if he inherits it, he would not have to pay capital gains taxes on that.

The "best" strategy depends on too many things that aren't obvious from your question, like what the total amount of your estate is expected to be, how much this property is worth and what you paid for it, and the state you live in.

Answer 3

Since you're looking at a multi-million dollar estate if you're worried about inheritance taxes (which will be paid by your estate, not your son, by the way) you should be working with an estate planning attorney or CPA, not posting that on Yahoo! Answers.

Answer 4

If that was his entire estate, you don't even have to file an estate tax return. But, you do need to file an income tax return for the Estate of Your Dad. The earnings (rental income) and the sale of the properties from the date of death until the date the asset is transferred to the beneficiaries is reported on the 1041 for the Estate. You individually only report your income or sale of property AFTER the estate transfers it to you. It appears you sold the assets prior to distribution and then distributed the cash. Therefore, the rental income and the sale (cap gains) would be reported on the 1041, which is the income tax return for the estate.

Answer 5

Hi, first of all, since he would own the property and sell it, current law states that you get a $250,000 exclusion (another $250,000) if he was married, with no capitol gains if it was used as your principal residence for the prior two years. He would only pay the capitol gains on anything over that. Second, if you are just trying to avoid a lengthy probate process you could put it in a revocable trust. Which means you have the option of changing it any time, but if you should pass, it would go straight to him without a probate process. I hope this helps

Answer 6

Why are you worrying about what's going to happen when your son SELLS the property??? You have no idea what the property will be worth at some unknown date in the future when your son may want to sell it. And what if he decides NOT to sell it, and it passes on to another generation? You can't eliminate all the possibilities in advance. You can avoid inheritance taxes, or you can avoid capital gains taxes, but you can't avoid BOTH on the same piece of property. That's just the way it goes.

Answer 7

If you are talking about whopping taxes why are you looking on a Yahoo board to answer your question? Obviously you have some money. Why won't you spend a couple of hundred dollars and ask a professional? It would seem to me that it would be money well spent. Don't you agree?

Answer 8

You should look into setting up an revocable living trust with an incapacity clause. Also have a will. Call up an estate lawyer who specialize in these types of matters.

Good luck.

Answer 9

I'd say listen to CPA... Thanks for the points!