Gift a Home or Inherit it?

gift a home or inherit itThe other day someone called a radio talk show and had a situation that troubled the caller and is also disturbing to listeners because of the potential tax liability and steps that can be taken to avoid it.

The elderly father of the caller had switched his deed on his home to his daughter a couple years ago because he knew his daughter would eventually get his home and he didn’t want to burden her with the transfer after he died. Her father would continue to live in the home and take care of it so it wouldn’t cost her monies now.

But, unknown to either party was that transferring a title on a home before death can have significant tax implications to the transferee. When the father “gave” his home to his daughter, he transferred the original basis or what he paid for the home to his daughter. If she sells the home in the future, she realizes a gain which is the difference in the net sales price and her father’s original basis which can be a lot higher value than when it was transferred to her.

If he purchased the home for $75,000 and at the time of transfer it is worth $250,000, there is a possible gain of $175,000 and income tax repercussions based on the $250,000 value. However, if his daughter had waited to inherit the home, the basis would have been “stepped-up” to fair market value at the time of her father’s death. If the new basis is $250,000 then there would be no gain for his daughter to need to claim.

With most cases, inheriting a home carries less tax consequences than gifting of a home. Knowing the difference between a gift and inheritance is important and you should seek out expert tax advice before any steps are taken to switch responsibility on any real estate property.

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