By coinnews 
00:00 Speaker A
Well, when it comes to estate planning, your home is often one of the biggest assets and how you pass it down matters. We want to look at three ways that you can plan to pass your home down. One, you can gift it to your kids while you’re alive. Two, you can sell the home to your kids while you’re alive. And three, you can have your child inherits the home after you pass away. And here to discuss the tax implications of all of the options, we’ve got Jerry Doyle, BNY Wealth Tax and Estate Planning strategist. Jerry, good to have you here with us. So, let’s start with being gifted the home. What are the implications there?
00:52 Jerry Doyle
Well, gifting the home, you may have an issue because a lot of the real estate has appreciated substantially. So, if a parent gives a house to a child, there is going to be a gift, a taxable gift for gift tax purposes. And unless they’re super wealthy, the parents are super wealthy, they’re going to have adequate exemption in order to offset that gift and they won’t actually have to pay any gift tax. But the downside for the child is that the child will take the parent’s cost basis in the house, and a lot of parents have, you know, they purchased their house when the market value was way down or when they, uh, they paid, uh, just a little bit of money for the house and has appreciated substantially. So, what would happen is if Mom and Dad gave the gift, uh, made a gift of the house to the child, the child would take Mom and Dad’s cost basis. So, they not only get the house, but they get the embedded gain in the house as well.
02:24 Speaker A
How about selling the home to your family, your your child?
02:37 Jerry Doyle
Well, obviously, the sale would be a taxable event. The there would be a $250 to $500,000 exclusion depending upon filing status. And I’m assuming you’re transferring a primary residence as opposed to a vacation home. If it were a vacation home, uh, not your primary residence, the whole gain is going to be taxable. So, Mom and Dad are going to have to pay tax on that gain when it goes over to the child. Now, in a lot of cases, what parents may do is they may say, “Okay, what we’ll do is we’ll give you a sweetheart deal.” Uh, let’s say the house is worth $700,000. Mom and Dad agree to sell it to the child for $500,000. Well, now you’ve got a part sale, part gift. And what would happen would be, uh, they’d have a gift in my example of $200,000, the difference between the $700,000 fair market value and the $500,000 they’re selling the child for, and then also have to pay tax on that gain, the difference between the $500,000 proceeds that the child is going to pay for the house and whatever the parent’s cost basis is in the house.
04:12 Speaker A
Now, what about inheriting a home or real estate after your your parents pass?
04:22 Jerry Doyle
Inheriting the house is probably the most tax efficient way as long as the child can wait. Uh, so if a parent dies and they transfer the house after death to the child, the house will the cost basis of the house will be stepped up to the fair market value as of date of death. So, any embedded gain goes away. The parents don’t have to pay any income tax on the sale of the house because it’s inherited. And the child gets the house without any income tax, and they get a cost basis equal to the fair market value as of date of death. So as a result, if the child can wait, inheritance is probably the most tax efficient way to transfer a house to a child.
05:21 Speaker A
Earlier this week on the show, we talked about when to use a trust in your estate planning, and you can pass your home by putting it in a trust. What are What are some of the tax implications there? And and is that something that you recommend?
05:43 Jerry Doyle
Uh, I would go for whatever is the simplest, and I think just transferring it outright is the simplest. If the child has some issues, like if they have creditor issues or there’s some other issues, maybe there are multiple children involved, they’re going to be owners of the house, maybe a trust works, but a trust necessarily isn’t always the best option. Like I said, I like to make things as simple as possible, and unless there are other factors, I would transfer the house outright.
06:16 Speaker A
And so, just lastly here, as you’re thinking about if you did inherit the home and then decide to sell the home later on, what are the tax implications there?
06:33 Jerry Doyle
Well, what will happen is you’ll get your your parents, um, when your parents die, whatever the value of the house is, that’s your cost basis for income tax purposes. You turn around and sell it. If there’s any appreciation between the date of your parent’s death and the date of your sale, you’d pay tax on that appreciation. And if it’s your primary residence, remember, you get a $250 or $500,000 exclusion, gain exclusion, depending upon your filing status. So, some of the gain, you may not have to pay tax on any of the gain unless you’re over that $500 or $250,000 threshold.
07:20 Speaker A
Jerry, thanks so much for taking the time here with us. Really appreciate it.
07:25 Jerry Doyle
Thank you.