You may have heard that it is a good estate planning idea for a parent to transfer his or her house into a child’s name and ownership.
The two most common reasons you will hear are, “It saves on inheritance taxes” and “It makes distribution of the estate easier.”
Let’s take a look at a house that is worth $300,000 today that was purchased 35 years ago for $90,000. We’ll look at two ways to transfer the house.
First, if we gift the house from parent to child, the parent will have to file a Form 709 Gift Tax Return to avoid paying the gift tax. The child now owns the house, a $300,000 asset with a $90,000 basis (i.e., the amount the parent paid for it). When the parent dies, there is no inheritance tax to pay, as child already owns the house. As we’ll see below, this can represent up to a $13,500 savings.
Second, if the house was owned by the parent when he or she died, the child would inherit a $300,000 asset and there is 4.5% inheritance tax to pay – $13,500.
Now – let’s see what happens when the house is sold. If the first person sells the house (the one who received the house as a gift while the parent was still living), they must pay capital gains tax on the amount of gain they have realized. They have to pay capital gain tax of at least 10% and as high as 20% on the $210,000 ($300,000 value minus the $90,000 basis). The percentage depends upon the tax bracket the child is in. That equals to $21,000 to $42,000 which must be paid in Capital Gains Tax on the sale of the house.
This example is why you should never put the house in a child’s name in order to save on inheritance taxes. It almost never works out the way we hope it does. There are other reasons you might put a house in a child’s name, but beware of the tax bite that will almost certainly accompany this change.
Please contact us at 717-241-6500 or by email to [email protected] Take the time, be intentional, and write your Last Will & Testament. Leave a legacy that you will be proud of.
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