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Say someone's parents owned a paid off house worth 500,000. Can they sell their house to one of their kids for a dollar before death? Will uncle Sam stick his nose into this situation? Thoughts
They can, but why??? If a parent sells their home to a kid, that kid's basis for the house is $1. Meaning when that kid sells the house for 500K, that kid owes tax on the ENTIRE amount, less the $1.
Best thing is to set up a trust for the parents...when they die and it goes to the heirs (named in trust) the basis of the house is its value on date of death of last parent....no taxable gain.
In SOME states you can do TOD (transfer on death) with homes, but you should see a lawyer about that...in any case, see a lawyer who handles elder law (common nowadays).
They can, but why??? If a parent sells their home to a kid, that kid's basis for the house is $1. Meaning when that kid sells the house for 500K, that kid owes tax on the ENTIRE amount, less the $1.
Best thing is to set up a trust for the parents...when they die and it goes to the heirs (named in trust) the basis of the house is its value on date of death of last parent....no taxable gain.
In SOME states you can do TOD (transfer on death) with homes, but you should see a lawyer about that...in any case, see a lawyer who handles elder law (common nowadays).
Totally agree.
The cost basis is at whatever the value is at the transfer. Just as if the child had bought a house from Joe Mainstreet for $1 and sold it $200k
If I pay my father $1 for his house, and sold it after his death for $200k, I would have a major problem. A $199k problem.
But if he dies and it worth $150k then I sell it, I have only the $50k to deal with.
As noted, like my father did, set up a Revocable trust , or you could do a "Life Estate ", whereby you have the house and live in it as owned until death, then it transfers. A REVOCABLE TRUST can be changed if you changed your mind. An Irrevocable trust is carved in stone. You want a REVOCABLE TRUST set up.
You can have a will, but a trust will Trump the will, though you can have a will for assets acquired outside the trust. A trust helps also to mitigate probate costs, which m9st people don't think if when executing a will only.
Contact an elder attorney and or a CPA and or Revocable trust management entity or all three to mitigate the damage.
I'd not want to buy my father's house for $1 though it would be tempting. I'll wait for it to pass to me through his REVOCABLE LIVING TRUST that he set up over a decade ago.
see a lawyer skilled in this stuff .playing games with trusts can jeopardize the house if medicaid long term care is needed .
any kind of revocable trust takes a protected asset and pulls the layer of protection off it .
i see general practitioners make this mistake all the time recommending trusts for the family home since they are not as skilled in this stuff as an elder law attorney would be .
Totally agree.
The cost basis is at whatever the value is at the transfer. Just as if the child had bought a house from Joe Mainstreet for $1 and sold it $200k
If I pay my father $1 for his house, and sold it after his death for $200k, I would have a major problem. A $199k problem.
But if he dies and it worth $150k then I sell it, I have only the $50k to deal with.
As noted, like my father did, set up a Revocable trust , or you could do a "Life Estate ", whereby you have the house and live in it as owned until death, then it transfers. A REVOCABLE TRUST can be changed if you changed your mind. An Irrevocable trust is carved in stone. You want a REVOCABLE TRUST set up.
You can have a will, but a trust will Trump the will, though you can have a will for assets acquired outside the trust. A trust helps also to mitigate probate costs, which m9st people don't think if when executing a will only.
Contact an elder attorney and or a CPA and or Revocable trust management entity or all three to mitigate the damage.
I'd not want to buy my father's house for $1 though it would be tempting. I'll wait for it to pass to me through his REVOCABLE LIVING TRUST that he set up over a decade ago.
Best of luck deciding how to proceed.
When your Dad dies and you inherit his house, your basis is the house's value on date of his death. Not sure I follow the 50K gain....unless you hold onto the house a long time, then yes, at a later date you sell it for 200K you would pay taxes on 50K. But if you sell the house quickly (as do most heirs), chances are its value at date of death is pretty much the sales price.
They can, but why??? If a parent sells their home to a kid, that kid's basis for the house is $1. Meaning when that kid sells the house for 500K, that kid owes tax on the ENTIRE amount, less the $1.
Best thing is to set up a trust for the parents...when they die and it goes to the heirs (named in trust) the basis of the house is its value on date of death of last parent....no taxable gain.
In SOME states you can do TOD (transfer on death) with homes, but you should see a lawyer about that...in any case, see a lawyer who handles elder law (common nowadays).
Isn't capital gains on selling a house any profit over $250,000? So the person would actually owe taxes on $250,000 on a $500,000 profit or am I wrong?
no , that rule only applies to a primary residence you lived in for 2 years . he would owe tax on 499,999.00 unless it became his primary home for 2 years as the owner .
no , that rule only applies to a primary residence you lived in for 2 years . he would owe tax on 499,999.00 unless it became his primary home for 2 years as the owner .
Thank you. I was wrongly assuming it would become his primary residence.
Say someone's parents owned a paid off house worth 500,000. Can they sell their house to one of their kids for a dollar before death? Will uncle Sam stick his nose into this situation? Thoughts
Two thoughts:
Let's say the parent's basis in the house is $100,000.
The IRS would call the sale to child for $1 a non-arms-length transaction among family members. The Parent's tax return, at a $1 sale price, would not reflect the hypothetical $400,000 of gain in a true arms-length fair market value transaction. Yes, I know about the cap gain exclusion on a primary residence, but you get the idea.
It is all about minimizing the value of gifts so as not to end up exceeding the lifetime gift tax exclusion (about $5 Million)
The basic idea (oversimplified) is the parents give the house to the Qualified Personal Residence Trust, but the house is encumbered: the parents retain the right to live in the house for, say, the next 20 years at a nominal rental rate (say, $100/year) when the fair market rental rate is much higher (say, $30,000 per year).
That difference in actual vs market rental rate for the next 20 years "encumbers" the property, thereby reducing the property's fair market value today. So, instead of the house being worth $500,000 today, the encumbrance reduces its value to, say, $300,000.
This gets the house out of the parent's estate only soaking up $300,000 of the gift tax exclusion rather than the fair market value of the house absent the QPRT which would be $500,000.
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