As we age, we begin to think more and more about what we can pass on to the next generation and their families. One of the best ways to pass on wealth is to transfer ownership of a home or other real estate. Under the law, individuals utilize one of many different way to accomplish this goal, each with its own set of benefits and drawbacks.
In order to avoid placing your loved ones in an unwanted tax situation, carefully examine your situation and tailor a plan that is right for you and your family. With a little time and effort, you can ensure the transfer of your home and other assets goes as smoothly as possible.
Naming your family as beneficiaries in your will
Perhaps the easiest way to pass on your home is to name your deserving family members as beneficiaries to the estate in your will. Most of us are familiar with the concept of a last will and testament, describing how we expect our estate to be apportioned to family and friends after we pass away.
There are major tax benefits to passing on homes directly through children in a last will and testament. For starters, homes worth less than $5.25 million are not subject to state and federal inheritance taxes. Furthermore, children will not have to pay capital gains tax on the home simply for inheriting the property and also see a “stepped down” capital gains tax should they choose to sell the property.
Placing the home in a trust
An alternative to leaving your home to your children in a will is to create a living trust. Trusts can be a good way to avoid certain taxes and to keep assets out of probate court where “interested parties” may may challenges to the assets.
It is important to note that if the home is placed in a irrevocable trust, you will no longer have any control over the property while you are alive. However, since the home is going to your children, this may not be a major issue.
Gifting the home
Federal and state tax laws allow individuals to gift almost $5.5 million to friends and family without paying any gift taxes. However, if you gift your home, even if it is below the tax threshold, you will still need to file a gift tax return with the federal and state government.
It is important to understand the home may be subject to capital gains taxes in these situations and your children receiving the home will be responsible for this on their part. Those taxes are based on what your home is currently worth minus what you paid for it.