Home Transfers: What You Need to Know About Taxes and Inheritance
Freddie: When a parent transfers a home to a child, it can raise questions about taxes, reporting and inheritance planning. This episode explains whether the IRS needs to be notified, how gift rules apply and what it could mean if the home is sold in the future.
Hello again everyone, and welcome to this episode of Leibel on Fire. We're talking about things mom may have told you, and we are with Leibel Sternbach. Leibel,
hello and welcome back to the show.
Leibel: Hey, how are you doing today?
Freddie: I'm doing well. I, I like the title of things Mom should have said, and this topic is actually my mother transferred the title of her home to me. Do I need to report this transaction to the IRS? I'm going to say that we need to talk to Leibel Sternbach about this.
So do I need to report the transfer of the of mother's home when I get it to the IRS?
Leibel: So that becomes a complicated question. It's not that easy then, huh? It's not that easy. Um, so we've got a few different things that come into play here. And probably the thing that's gonna give you the most headache is your state laws rather than the IRS.
The state laws when it comes to gifting and gift taxes and inheritance are a lot more complicated than when it comes to the federal. So the federal government, it used to be the answer was yes. You had to report it, you had to pay a 50% tax, and people were very upset about that. And one of the things that the Secure Act and the Secure 2.0 Act took care of, was it created this.
Concept of a universal gift lifetime exemption. And so what that says is. Whether you give them money while you're alive, because a lot of people like to give things while they're still alive and see it be enjoyed, right? While they're alive, rather than over their dead body when they can't really, you know, uh, enjoy any of it, right?
So if you want to give your kids and your grandkids, 'cause that's what people were doing, and that's what people are doing is they're gifting these things. While they're still alive, that instead of it being that you'd have to pay a gift tax, which was 50% over the annual threshold, and that was a very significant burden.
And so people weren't gifting money. So instead of gifting that money instead of making it a taxable event, what they said is, well, you're gonna gift to them anyways when you die. So let's just make it one set of one number, right? Whether you give it while you're life, whether you give it when you're dead, it's gonna be the same.
Non-taxable event, and we're gonna make that non-taxable threshold, which it used to be a very low number. We're gonna make that a very high number so that for the vast majority of people, they will never pay taxes on that money that gets inherited that or gets gifted to them by their parents or grandparents, or by somebody who loves them.
Freddie: That's interesting. So it is, you're telling us that it, when that when mom or dad, uh, moves the house to you is considered a gift. So if that's the case, then are you also saying that no taxes apply?
Leibel: Well, the question becomes, first you gotta answer the question, is it a actually a gift or was it a legitimate transfer of ownership where you purchased?
Right. So if you purchased it for a free market value, then it's not a gift, it's a purchase. Right. Okay. If that was the case, then it's not a gift. Right. And that doesn't get reported. If however, it was a gift and they literally just, gave you the title or. They gave it to you for less than the fair market value, then that difference becomes a gift, right?
And so now you don't have to pay taxes on that gift, assuming that they haven't used up their lifetime exemption. Um, which very few people will be in that category of having used that up. But you know, assuming they haven't used it up, then it's a tax free gift. It still needs to be reported, but you don't pay taxes on it, and it's gotta be reported at two times.
The IRS wants it reported on that year's tax return. You'll file a gift tax return. If you're splitting the gifts, but you basically report that you gave the gift. You also have an annual exclusion that you'll wanna apply, right? So that it doesn't apply to the whole, um, and again, it's a non-taxable event.
You're just letting the IRS know, Hey, this thing happened. The other thing is when the person passes and you file that final tax return, you're gonna file on there and say where the money went. And you're gonna. You're gonna say that this house, if it was transferred within three years' death, you're gonna say that it was, you know, this was transferred to this person and this is, you know, uh, and then it'll add up all of the gifts to come up with that exclusion.
And if assuming it's under the exclusion, then there's no taxes due on it.
Freddie: We're talking with Leibel Sternbach about, uh, transferring titles of your home and whether or not it's taxable. And, uh, the general answer so far that we've gotten from your Leibel is that it depends. So what happens? Okay, so now I've got the home.
What happens if I happen to sell that property later on? How does that cost impact me? Uh, what's the cost basis involved?
Leibel: So now, now we're getting into really, really complicated questions. So generally speaking, and this goes into whether you purchased it or it was gifted to you,
Freddie: okay?
Leibel: If it was, if you purchased it, then your purchase price is generally the price, that's assumed when you receive it, however.
Because of this whole gifting phenomena that's happening, um, and the fact that you're receiving it and you're receiving this thing that has value to it, right? It's not worth nothing. Because you're receiving something that has value, the value of that thing when you sell it.
Anything above that value is going to be profit, and you're gonna have to pay capital gains on that profit. The way how much is calculated as profit is generally going to be. And this depends on when the person dies because different rules come into play. And so again, I advise you if this is something that is something that affects you, talk to a CP eight.
Talk to a tax expert, Google it for yourself. The IRS has it on their website. But depending on your specific situation, one of two rules is either going to impact you. It's either gonna be the value, the cost basis that the original owner has, that is gonna be the cost basis that you're gonna use. Or again, depending on how it was transferred and when they died, it could be the value at the time that they transferred it to you.
So, or it could be the value at the time of death, there's a possibility for that too. So depending on those situations, determine what number you use, but generally speaking, when something is transferred to you and then you sell it at a later date. If it's a gift, you are going to just assume the owner's cost basis in the thing.
And so when you sell it, if you know they bought it for a dollar in, 1970, uh, or, you know, let's let, let's use realistic numbers. Let's say they bought a house for $20,000 in 1970, okay? They gift it to you in 2025. That house is now worth, you know, a half a million dollars. And then you turn around and sell it for, you know, a million dollars, right?
So. Not only do you have the $500,000 of profit that you ordinarily would have, but you would also have the $480,000 of profit that your parents would've had if they had sold it. Because they transferred it to you as a gift. Because it was a non-taxable event.
Freddie: Interesting.
So you really need to sit down and really plan through this whole thing because it doesn't, it seems really, really simple. Mom passed away, sent it over to me, and now is mine. But now there are a lot of, uh, details that have to be worked through. So I'm wondering, and I think you may have answered this Leibel.
Would inheriting that home instead of receiving it be a better option? Or are we still talking about the same thing?
Leibel: Well, so possibly so there. So when it comes to inheritance, and this is something that, that parents really need to keep in mind, depending on how you're transferring the assets and when you're transferring it, if the purpose is if your kids don't need it while you're still alive, right?
And it doesn't make a difference to them, whether you give it to them now or when you pass. There may be value to them receiving it when you pass because of something called a step up in basis point. So when they, when someone inherits something after death, the IRS kind of gives 'em this gift, this one time gift that says that the value of the thing that they're receiving is gonna be the fear, market value at the time of death.
So if you, going back to the house example, you purchased that house in 1970 for $20,000, they. Inherit it in 2025 for 500,000. Instead of them having a cost basis of $20,000 and then having to pay taxes on 480,000, they receive it with a value, a cost basis of 500,000. And so now they're only paying taxes on whatever.
Profits from when they sell it, which is a very different situation than if they just assume your cost basis because it was gifted to them. And so that becomes a, a wrinkle that you gotta really think about when you're inheriting it. I'm also gonna throw something out, as well, is something to consider as annuities.
Annuities are taxed in a very different way. And so when, annuities have a portion that's principal and they have a portion that is the growth and that taxes, the growth is taxed as ordinary income. The, depending on whether, if it's a non-qualified annuity. You don't get a step up in basis points, right?
So this thing that everyone else is getting when they inherit something where they don't have to pay taxes, people who inherit your IRA, uh, sorry, your annuities, they're going to pay taxes on that money. And so what you want to make sure, is that an annuity that you plan on leaving as an inheritance or if it is left as an inheritance?
Gets paid out as a death benefit and it's not inherited. And that is very important that you have that distinction. You don't want that for spouses, but you want it for nons, spousal beneficiaries, and usually you have to pay more to have that feature turned on, or you need to make sure that it's a feature that's available in your policy.
So again. When it comes to inheritance and gifting right, you, it is not a simple, you know, easy decision. You gotta really plan this out for the asset type and how it's gonna be used and how it's getting transferred.
Freddie: What can we [email protected] on this topic? It sounds there might be like a checklist or do's and don't associated with this Leibel.
Leibel: Yeah, so we have a few resources when it comes to this. So, um, we have a five minute estate planning guide, which I highly recommend that everyone go through. Um, and it goes through kind of some of these considerations. It is more at a high level, right? To make sure that you've got your. T's crossed and your i's dotted when it comes to an estate plan, and it tells you, you know, the questions to think about and what are the really, the important things.
'cause for a lot of people, you know, this complex planning may not be the most important thing. Maybe, you know, a lot of times it's usernames and passwords so people know where things are and what they are, right? So, you know, it goes through, you know, what those considerations are.
The other resource, there's a download that has a whole bunch of guides in there. And it, when it comes to these specific questions of, you know, of one, someone to inherited a house, uh, business, whatever, there's a bunch of workflows that you can go through that'll help you decide, what is the best way to do it? Should you gift it now? Should you gift it upon death? There's various considerations over there. And again, like I said, right? Everyone's situation is different. Reach out to us, more than happy to take a look and give us, give you our 2 cents on what we think. Keeping in mind that we're not lawyers, but we are financial planners.
And so, and we are tax, you know, advisors. So we will give you that perspective from our perspective as being an advisor, what we think, you know. What we think is advantageous and what you should look at and what are the conversations that you should have with an attorney if you should have it.
Because there are a lot of nuances including something, you know, uh, something that most people don't consider. You know. They don't realize, like the state of Florida, most of the counties, the way they fund themselves is by people passing who are non-residents. Wow. There's a huge tax for non-residents on inheritance specifically property, and that's how they fund their entire government.
It's how Florida and the counties are able to maintain you know, zero income tax. Is because they're living off of all the non-residents and recouping their money there.
Freddie: That's really something to keep in mind. We've been talking about what seems like a really simple topic of what happens when parents transfer their properties to their, their family members and so forth.
But it's more complex than that, and you can find the details as Leibel has just talked about. It yields for you.com. So as I mentioned, passing down. Home involves a little bit more than just the title change. It can impact your taxes, it can impact Medicaid, it can impact inherent strategies. Do you have the right one?
With the right planning families can make the best choice for both parents and the children while avoiding costly mistakes. I'm Freddie Bell for Leibel on Fire and we'll see you again next time right here.
