Tax benefits of inheriting a home

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Dear Steve,
What’s the best way to assume ownership of my mom’s home? My dad has passed away but Mom is still alive. Should I take the house as a gift or wait to take it in inheritance?

Are there any new law changes regarding this that I should know?

Dear Clarence,
Generally speaking, it’s better to inherit a home rather than have it gifted to you, assuming a person has a choice in the matter. But different circumstances result in different strategies.

Inheritance: Your cost basis in the house, or the amount on which its taxes are calculated, would be considered the current fair market value of the house if you were to inherit the place upon the death of your mother. If mom’s house is worth less than $250,000 and her estate is worth less than $3.5 million (up from $2 million in 2008), you wouldn’t owe taxes on it.

Gift: If it was gifted to you, and your mom hasn’t given away a total of $1 million to you in your lifetime beyond the automatic $13,000 annual tax-exempt gift (up from $12,000 in 2008), the gift should be tax free when you get it.

However, the cost basis for a gifted house would then be considered the amount your mom originally paid for it. For example, if she paid $35,000 for the property in 1975, and you were to turn around and sell it for $300,000 now, then by tax law you would have made $265,000 in profit. Hence, you would have to pay taxes on $15,000 of that, because it is the amount above the individual $250,000 capital-gains tax exclusion for which you’re eligible. Also, if the value rises as the years go by before you sell the place, so would your tax liability. Mom would also have to file a gift-tax return.

Another more timely option may the creation of a qualified personal residence trust, or QPRT, for a set term in years. With home values so low now, the creation of a qualified personal residence trust just might ensure that your mom’s estate won’t contain a significantly more expensive home in the future, resulting in a more costly estate-tax bill.

A QPRT essentially removes the asset from your mom’s estate while allowing her to live there. The problem with this is that if she were to die before the trust was terminated, the house would be included in her taxable estate, and regular estate taxes would apply.

Not knowing all the details, I strongly advise your decision be made with the help of an estate planner or otherwise qualified attorney or accountant. There are numerous nuances to these arrangements that only a professional can address. Most important here is that you protect your mom’s resources to allow for optimal elder care.

Whatever you do, make sure her property is appraised by a professional appraiser. This will eliminate any potential IRS valuation questions. Also, know that the new Congress may change some of the rules and regulations surrounding inheritance.