After the last surviving parent passes away, the estate may sell his home. The proceeds are then divided up, pursuant to the directions set out in the will. If children are the heirs, they may split the funds among themselves. However, what are the tax consequences?
nj.com’s recent article asks: “I inherited my father’s home. Do I owe any kind of taxes?”
The article explains that the federal estate and gift tax exemption amount is now $11.4 million. In California, there is no state estate tax at this time. There is also, however, the question of income taxation and potential property tax reassessment.
The proceeds from the sale of the house will be subject to income tax. However, it’s unlikely that a person would incur the tax, because income tax is paid on the difference between the sales price and the basis of the asset, minus costs of the sale. “Basis” is generally defined as the purchase price, plus the cost of improvements. Assets owned by a decedent receive a “step-up” or a “step-down” in basis to the value, as of the date of death. This means that a child inheriting a parent’s home and then selling it, would only be taxed on the difference between the sales price and the value at the date of death, less selling costs, assuming the parent owned 100% of the home at the time of his death.
If this difference between date of death and sale values is substantial, the adult child would incur a tax, typically at capital gains rates. However, as a general rule, there’s little or no gain to tax if the decedent owned the property in his or her name or in his or her trust at death. The exception would be if the house, or part of it, is held in a Bypass/Exemption Trust then there would not be an adjustment on that portion at the death of the second spouse.
Be sure to keep evidence of the date of death value of the parent’s home, in case there’s an income tax audit down the road.
In California, property taxes are reassessed upon a change of ownership of a property. So a transfer from parent to child would be a change of ownership. Fortunately, the parent's residence can pass to a child without incurring a reassessment of property taxes. A Claim for Reassessment Exclusion would have to be filed when the ownership transfer is recorded.
One problem that often presents is the house is the only asset to be divided between multiple beneficiaries but only one child wants the property. In that case, if one child buys out his or her siblings, then the purchased part is reassessed but the inherited part is not.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: nj.com (March 11, 2019) “I inherited my father’s home. Do I owe any kind of taxes?”