Before the days of estate taxes, children simply moved into the family home and took over the master bedroom after their parents died. Unfortunately, it’s not that easy anymore.
There are several ways to give a home to your child. And a few are tax-free. But in order for the transaction to work properly, you’ve got to plan ahead. Here is a rundown of your options.
If you plan to live in your home until you die, and your estate is below the unified federal estate gift and estate tax exemption amount ($5.43 million for 2015), this is your best strategy. When you die, your home’s tax basis will be stepped up to fair market value. So you and your heirs will escape capital gains tax on your home’s appreciation. And, because the value of your estate is below the estate tax exemption, your heirs will owe no federal estate tax. They are free to move into the house, or sell it and keep the cash while owing little or no tax to the Feds (thanks to the basis step-up rule). If they do move into the house, their tax basis for calculating the gain or loss on subsequent sales will be the home’s fair market value at the time of your death.
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