We frequently have clients call our office and ask us to prepare a deed to gift their real estate to a family member, often a child. Most of the time, the client tells us they want to do this because “They’re going to get it anyway when I die” or because “I want them to have it in case I go into a nursing home.” When faced with these scenarios, our skilled real estate attorneys step in and explain the downsides to this approach, and why other solutions might be better—here’s why.
A Real Estate Gift Might Have a Hefty Tax Burden
Generally speaking, when real estate is gifted to someone, the recipient gets a carryover tax basis in the property. Basis is a valuation of the amount the property is worth for tax purposes.
Here’s how it works. Let’s say Dave gifts real estate he’s owned since 1975 to his son, Dan. Dave’s tax basis in the property is $50,000, which also becomes Dan’s tax basis in the property. Dan keeps the property for a couple of years, then sells it for $350,000. However, Dan is shocked when his accountant tells him he now owes significant capital gain taxes on his $300,000 gain.
Why a Will or a Trust Is a Better Option
The legal team at Skeeters, Bennett, Wilson & Humphrey recommends leaving property to loved ones in a will or a trust. This enables recipients to get a stepped-up tax basis, which means their tax basis becomes the value of the actual property when it passes to them through the will or trust.
To revisit our example above, assume that Dave left the property to Dan through a revocable living trust instead of gifting it. Upon Dave’s death, Dan inherits the property from the trust, and his tax basis is the value of the property when it came to him from the trust, say, $350,000. If Dan then sells the property for that amount, he owes no capital gain tax because he sold it for the same value it had at the time he inherited the property.
Use Detailed Estate Planning to Protect Assets
Proper planning with a qualified attorney can amount to significant savings. Further, careful drafting of a trust can shelter real estate property and other assets if Dave were to require long-term care.
There are scenarios where outright gifts of real estate make sense, but the key is to be informed of your options by consulting a qualified estate planning attorney who can properly advise you on the best option for your situation.