2 Ways to Avoid Taxes on Your House for Your Heirs
By Solid Serenity Legal Solutions
Nowadays, it is common knowledge that probate is costly, stressful, and time-consuming. So, families are often searching for the easiest, cheapest ways to avoid probate.
Instead of opting for a trust, it has become common for parents to add their adult children to their deeds to give the children ownership of the property. Because the children own the property, they do not have to go through probate.
Though it is true that your children will not have to go through probate on your property if they are joint owners, naming adult children as owners of your home before your death can be costly in other ways. Namely, in taxes.
Here are 2 ways to avoid taxes on your house for your heirs after your death.
(1) Use a Will
Many people do not realize that there are tax breaks for inherited property. When you give property to your children before your death, those tax breaks can be taken away.
If you use a Will to leave your home to your children, your children will have to go to Court and pay for the Court process. However, this may be the cheaper route for your family.
If your children are named as owners of your property and they sell that property after your death, they will have to pay capital gains taxes on any increase in the value of the property from the date of your original purchase.
For example, let’s say you have lived in the same home for 40 years. You chose a great location! So, your home, which you originally bought for $50,000, is now worth $250,000. Let’s say you have 2 children. You decided to put them both on your deed as owners of the home. So, each child inherits 1/2 of the home on your death.
The increased value of your home at your time of death is $200,000. Your children cannot claim an exclusion for living in the home. So, they have to pay capital gains taxes on the sell of the home of $20,000 each.
Yes, a probate would cost your heirs money. But, it is highly unlikely a probate would cost your children $40,000.
If the children inherited the house from you through probate, their valuation for capital gains tax would be the fair market value at the date of your death. So, if they sold the house quickly after your death, they would not be taxed on the increased value, saving them $40,000 in taxes.
(2) Use a Trust to Transfer Your Property to Your Children
Another option to transfer your home to your children after your death is through a Trust. Trusts do avoid probate, if the property is properly titled into the trust.
If your children inherit your home through the trust, it works much the same way as if they had inherited the home through the probate process. The tax implications would be the same.
So, yes, a trust would be more costly to you to set up, but it would save your children 10s of thousands of dollars in taxes.
Find out more differences between Wills and Trusts here.
Be sure to set up your estate plan with a knowledgeable attorney so you can avoid these unnecessary expenses and pitfalls.