question about capital gains tax?

[Backwoods_VT]

my friends dad is leaving in his will a house worth 500,000 . he has live there for 40 years and the house cost 30,000 new. he put in a few bathrooms worth 50,000 at the time. If my friend gets it in the will , would he have to pay capital gains tax. Also if his dad were to give it to him tomorrow through a deed transfer would there be a huge capital gains tax? I know i should be able to figure out an easy question like this , but im just not sure. Also how does the new 2010 tax laws on capital gains and inheritance figure in? Thanks guys.

 

[DaveH]

Have him put it in the kids name in a living trust. (I think that's what it's called) A lawyer can do that for them for about 2K$.

When the dad dies, have it immediately appraised, the "inheritor" gets that as the basis. So if he later sells he would only have to pay possible tax difference if any between the more recent appraised price and the selling price (if any).

The great thing is there's no inheritance tax and no probate on the house since it passes ourside of what's considered the estate..

What really should do is contact an estate planner.

 

[Gollnick]

If my friend gets it in the will , would he have to pay capital gains tax.

No, the estate does if and when the estate sells it.

Also if his dad were to give it to him tomorrow through a deed transfer would there be a huge capital gains tax?

No. But because it is a gift in excess of $10,000, he'd have to count it as income and pay income tax on it which is probably worse.

Mr. DaveH's trust idea is a good one.

The father can probably (check into the details with a lawyer) sell the house and claim his one-time capital gains tax exemption. He could, for example, sell the house to his son for $500,000 and claim the capital gains exemption. Then, he can put the 500K into an investment which his son will inherit. If course, until dad dies, the kid is saddled with a 500K mortgage. But, if dad continued to live in the house and paid his son rent (afterall, dad's got 500K in the bank), that rent could pretty much make the mortgage payment.

If dad's still pretty young, then dad might want to consider forming a corporation and selling the house to the corporation (using this one-time capital gains tax exemption, of course) in exchange for company stock, say 50,000 shares worth $10 each. What this does is break the house up into 50,000 little pieces. Keep in mind that you can give someone upto $10,000 per year with no tax implication. So, dad can give his son a thousand shares every year with no tax implication. Of course, that would take fifty years in this case. This technique usually works best when there are several children and maybe some grandchildren. Keep in mind that dad can also gift his son's spouse and each grandchild $10,000/year. Meanwhile, dad can rent the house from the corporation for a nominal rent that covers property tax and maintenance. A lawyer can write the corporate bylaws so that the whole deal is airtight.

So, there are a lot of options.

Bottom line is:

What really should do is contact an estate planner.

 

[Dijos]

From MSN money.

Will I have to pay tax on a home I inherit?

Probably not, unless you inherit a house in a market where property values are very high such as New York or San Francisco. Your parent’s estate must total $2 million (in 2006) before tax issues become a concern. (The $2 million threshold remains in force through 2008; it rises to $3.5 million for 2009.) So if you inherit a house and either sell it immediately or live in it, you aren’t likely to have to worry about taxes.

If you hold the home as an investment and later sell it, you may owe capital gains tax -- as you would on any investment. Your basis (the amount from which a taxable gain is calculated) will be the value of the home on the date of your parent’s deaths.

For more information, see IRS Publication 950, Introduction to Estate and Gift Taxes on the IRS Web site, or talk to a tax professional.

 

[powernoodle]

Rule #1: don't take tax advice from anonymous goofballs on the internet (like Powernoodle).

Rule #2: when an heir takes title under a will, he takes at fair market value at the time of death; so Powernoodle thinks that friend's basis is $500K.

Rule #3: this is not legal advice; go pay a CPA or tax lawyer $300 for a real answer.

good luck!

 

[Backwoods_VT]

thanks guys, my friend made an appt with an elder law attorny to sort this all out. Thanks again.