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Question 4 and Our Answer

Here is the Answer to Question 4….

Question #4: “How can I avoid paying taxes when my home sells?” 

The second biggest reason why you shouldn’t give your house to your kid, is because they will take your tax basis on the house. To better explain this, let’s say that I bought a house in 1995 in Cranberry Township for $100,000. The house is now worth $300,000 which means I have a $200,000 capital gain. If I sell my house, as it’s my primary residence, I’m not paying any taxes. This is because there are exemptions for the sale of the primary residence from the capital gains tax. However, by giving my house to my kid while I’m still living there, I don’t own my house anymore. If I need to go to a care facility later on and I need to sell the house to pay for my care, my kid needs to sell the house. 

My kid owns the house for $100,000, because my kid took my basis on the house when I gave it to him. My kid could sell it for $300,000, but he will have to recognize a $200,000 capital gain, which could be taxed at 18%. This is a $36,000 tax mistake, because we transferred our house to the kid, when we should have used a trust. If we can structure a trust to protect the house from long term care expenses, and avoid a tax mistake, we’ve accomplished two goals. 

The Inheritance Option is Best

If however, I still own the house when I pass away, the stepped up tax basis would apply. This means my kid doesn’t own it for $100,000 because he inherited the house. He didn’t receive it as a lifetime gift which most people think is the preferred way to do it. My kid now owns the house for date of death value, so he owns the house for $300,000. My kid is free to sell the house for $300,000 and we’ve avoided the capital gains tax entirely. While there would still be inheritance tax payable at 4.5%, this is less than capital gains tax at 18%. 

If you are interested in reading more about Inheritance Tax, read this blog article…. https://sechlerlawfirm.com/the-three-death-taxes-the-good-the-bad-and-the-ugly/