Traditionally, parents pass down their estate assets to children and/or grandchildren either at the time of death or prior to death. If your parents are planning to retire to a warmer climate, downsize from their current home, or even move into a retirement community they may be considering what to do with the family home. Consequently, you may be wondering “ Is it a good idea for my parents to give me their home? ” Before you or your parents make a decision regarding the home you should sit down and discuss your specific situation and options with your New York estate planning attorney; however, there are some important tax consequences to giving away a home that will likely apply to any gift and that should be considered.
Any time real property changes ownership there are potential tax implications. First, when your parents gift the home to you the legal title to the property must change. When ownership of real property changes it sometimes triggers an assessment of the value of the property by the local tax assessor. That, in turn, could lead to an increase in property taxes each year. Property taxes, however, are the least of your concerns.
Your parents’ estate will be subject to federal gift and estate taxes when they die. Gift and estate taxes are levied on the combined value of all estate assets owned at the time of death and the value of all gifts made during a lifetime. Each taxpayer is entitled to use the lifetime exemption, set at $5.43 million as of 2015, to avoid paying taxes on assets and/or gifts valued at up to the exemption limit. If the home is gifted to you while your parents are still alive the value of the home will be included when calculating lifetime gifts for the purpose of determining if federal gift and estate taxes are due.
Most importantly, gifting the home to you while they are alive could set you up for a hefty capital gains tax bill when you sell the home. Capital gains taxes are incurred when an asset is sold and the seller realizes a gain on the sale. For example, if the home was purchased 50 years ago for $15,000 and you sell it tomorrow for $300,000 you will owe capital gains taxes on the $285,000 gain. If, however, the home is given to you at the time of death you will be able to use a stepped up basis, likely saving you thousands of dollars in capital gains taxes. A stepped up basis means you will use the market value at the time of death as your cost basis when calculating capital gains taxes should you sell the home down the road.
Before you and your parents make any decisions regarding the family home or any other estate assets be sure to consult with the experienced New York estate planning attorneys at The Law Offices of Kobrick & Moccia. The office can be reached by calling 800-295-1917 to schedule your appointment.