Capital Gains Tax

Tuesday, November 4, 2014

To Gift or Not To Gift?

During the course of estate planning, many families consider passing their homes onto their children as gifts. While this seems like a reasonable consideration, there may be potential tax ramifications for such a transaction.

Under current federal law, when you give anyone property worth more than $14,000 in any one year, you are required to file a gift tax form.  Additionally, the law stipulates you can gift or “give away” a total of $5.34 million over your lifetime without incurring a gift tax. This means that, if your residence is worth less than $5.34 million, you likely won't have to pay any gift taxes. However, you still must file a gift tax form, assuming it's worth over $14,000.

Here is the issue: While you may not have to pay gift taxes on the gift (a house), if your children sell the house right away, they may incur a steep tax penalty. When you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. Any profit from the sale can then be taxed. Therefore, they may lose a significant amount after the sale of the property.

For example, suppose you bought the house many years ago for $200,000 and it is now worth $450,000. If you give your house to your children, the tax basis will be $200,000. This means that if your children decide to sell the house, they will have to pay capital gains taxes on the difference between $200,000 and the selling price. The one exception to this capital gains tax liability is that, if your children live in the house for at least two out of the five years before selling it, they can exclude up to $250,000 ($500,000 for a married couple) of their capital gains from their taxes.

However, property that is inherited is not subject to the same taxes as property that is gifted. If your children were to inherit the property, the property’s tax basis would be "stepped up." This essentially means that the tax basis would be the present value of the property as of the date of death of the decedent, leaving the house through his or her estate. Therefore, by keeping your house as part of your estate rather than gifting it or selling it, your children will inherit the property at its current market value as of the date of your death, without incurring a capital gains tax liability which can reach up to 28% of the fair market value of the property.  Assuming that your estate is valued below the allotted $5.34 million federal estate exemption mark, such a method could prove to be a valuable planning strategy to consider. 

Trust and estate attorneys can guide families through the difficult process of creating a will.  For more information about estate planning strategies, contact our experienced New York estate attorneys at Maroney Associates, PLLC.

Based in Melville and Garden City, New York, the attorneys at the Law Offices of Maroney Associates, PLLC assist clients throughout Nassau County, Suffolk County, Queens, and the cities of Mineola, Hempstead, New Hyde Park, Franklin Square, Williston Park, Queens Village, Melville, Huntington, Farmingdale, Patchogue and Uniondale, NY.

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