A recent nj.com article asks: “My sister and I own my father’s home. How can I avoid taxes?” The article notes that a sibling can give his half of a home they own in joint ownership to a sibling, but there may still be some tax consequences.
If the brother was to deed his share of the home to his sister, he would avoid any capital gains tax when the house is sold. The sister would then be responsible for the payment of capital gains taxes, if any, upon the sale of the house.
Capital gains tax is defined as a tax imposed on the positive difference between the sale price of an asset (like a home) and its original purchase price. Long-term capital gains tax is a levy on the profits from the sale of assets held for more than a year. The rates are 0%, 15%, or 20%, based on your tax bracket. Short-term capital gains tax applies to assets held for a year or less. These are taxed as ordinary income.
Capital gains can be decreased, by deducting the capital losses that happen when a taxable asset is sold for less than the original purchase price. The total of capital gains minus any capital losses is called the "net capital gains."
Capital gains taxes aren’t assessed until the property is sold, but the sister living in the house will have a $250,000 capital gains exclusion.
In calculating the capital gains tax, the sister would be able to deduct the cost of any capital improvements and the costs of selling the home.
However, if the brother was to die within three years of deeding the home to his sister, she would have to pay an inheritance tax in states like New Jersey. The inheritance tax in that state is determined by the relationship of the deceased to the inheritor.
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 (July 18, 2019) “My sister and I own my father’s home. How can I avoid taxes?”