The cost basis used for capital gains tax purposes doesn't get a step-up at the time of death-instead, the child may get a larger tax bill on the portion of the house that was given to them if they eventually sell the house after the co-owner's death.įinally, if a child is added as co-owner, the home becomes an asset of that child, potentially creating additional issues. The value of the gift was $250,000 (50% of $500,000), but when mom died, the son's cost basis on his share of the house was still $125,000 (50% of the $250,000). ![]() Mom's original cost basis with improvements was $250,000, and the fair market value was $500,000 at the time mom added her son to the deed. Let's assume mom wanted to add her son to the deed of her home to facilitate its transfer at mom's death. The previous owner's cost basis will carry over to the new owner at the time of the gift. Secondly, assets that are gifted during the owner's lifetime will not receive a step-up in basis to the asset's fair market value at the death of the previous owner. If a single parent added a child to the deed, the parent would need to report 50% of the value of the home as a taxable gift (based on fair market value of the home at the time of transfer). ![]() When a house is given as a gift through co-ownership, the portion transferred is considered a taxable gift and counts toward the lifetime exemption, so it has to be reported for gift tax purposes. There is a limit to how much someone can gift another person without paying a gift tax, both yearly and in a lifetime. First of all, if a child is added as a co-owner, there are gift tax considerations. There are some downsides to this approach, however. If the deed lists someone else as a joint tenant, they will become co-owners at the time the deed is changed, and they will automatically take ownership of the home at the time of the original owner's death. One common idea that people have about passing the home to kids is seemingly simple: Just add the heirs as co-owners on the current deed. A family conversation helped them realize that a shared inheritance didn't make sense. ![]() Disagreement on whether to continue shared ownership could also have caused hurt feelings and disrupted what was otherwise a good relationship. If the siblings decided not to share the house and executed a transfer of ownership, it might have increased taxes and created transaction costs. Leaving the home equally would have created issues regarding maintenance cost, property taxes, and upkeep. ![]() However, one child lived far away and already owned a vacation home in that area. Although these conversations can be difficult, it is very important to have them, so you may want to have someone neutral help to facilitate the discussion.įor example, consider a couple who was planning to leave a vacation home to their 2 children equally so that the children could continue the long tradition of family vacations. Your children may have different ideas about whether they would want to live in, sell, or keep the property for investment purposes. First ask: What would you like to see happen with the house? After understanding your goals, be sure to discuss your wishes with your family. To prepare for a smooth and efficient transfer of a home, start by thinking about your goals and your financial situation. Input from everyone involved can make planning easier.
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