Senior Citizens and Adult Children Often Ask if They Owe Taxes on a Gift

Feb. 4, 2008 - As a Certified Financial Planner, I’m often asked about issues regarding inheritance, gifting and the resulting taxes. Here’s a classic example of just how complicated these situations can be, using a question from a reader in Michigan we’ll call ‘Bob’.

Bob writes, “I have a question about my mom's home that I inherited. Before my mom died she put her real estate into joint ownership between her and my sister. It was supposed to help make settling her estate easier.

“Before mom passed away, my sister died. After my sister died, mom placed the real estate jointly between herself and me. Mom passed away over a year ago and I am now contemplating the sale of her house. After mom's death I had the home transferred to my and my wife’s names.

“What are my capital gains liabilities on the sale of the house? Do I pay capital gains on the whole sale, half the sale, or none of the sale?”

Bob’s lack of knowledge is nothing out of the ordinary. Few people are aware of the tax implications and needlessly end up creating a tax headache for themselves and their loved ones.

Let’s explain what an inheritance is and how it differs from a gift. An inheritance is money, property, or another asset of value that is transferred after death. A gift occurs when money, property or other assets are transferred before death. An inheritance and a gift are handled very differently from a tax standpoint.

Each of us can give gifts up to $12,000 per year to any person we want without any Federal tax implications. (There may be some state gift tax implications so check with an accountant.)

Inheritances aren’t subject to Federal Estate Tax unless the estate’s value is over a certain amount, which is currently two million dollars. Because all assets owned by the deceased are included in the estate’s valuation (i.e. retirement accounts, annuities, life insurance, etc.), reaching that two million dollar limit is easier than you think.

Even if there is no gift or estate tax when the assets are transferred, there can be capital gain taxes when the assets are sold. The trick is determining the asset’s original value, or cost basis, and that depends on whether the asset was a gift or an inheritance.

When you receive a gift, you also receive the cost basis the person giving the gift had.

So, if a parent paid $10,000 for a home and it was worth $100,000 when it was gifted to the child, the child now has a cost basis of $10,000. If the house is sold 5 years later for $125,000, the child will owe taxes on a gain of $115,000.

If the house was instead inherited by the child, the cost basis is the value of the house at the time of inheritance, which in our example would be $100,000. So when the house is sold 5 years later for $125,000, the child only owes taxes on the gain of $25,000.

In tax parlance, the house received a step-up in basis when transferred after death. It doesn’t if transferred prior to death.

Let’s apply this to Bob’s situation. When Mom added Sister’s name to the deed, it was a gift to the sister of 50% of the value of the home and Sister’s cost basis was 50% of Mom’s cost basis.

When Sister died and the house transferred back to Mom, it was considered an inheritance. So Mom’s cost basis on the 50% she inherited was the market value at the time she inherited it back. So 50% of Mom’s ownership is based on her original cost basis and the cost basis of the other 50% is the value at Sister’s death.

When Mom then adds Bob’s name to the property, it’s another gift. So Bob will inherit 50% of Mom’s new, adjusted cost basis. When Mom dies and the other 50% is transferred to Mr. K, his cost basis in that 50% is the value at the time of Mom’s death.

Now you know why accountants make all that money!

If Mom had used a Living Trust instead, there would have been no need to add names to her house and her heirs would have 100% of stepped up cost basis, saving thousands of dollars in taxes.

If you have a specific question or would like more information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at jeff@guardingyourwealth.com. I will answer your financial question FREE.

Stylish showhome for sale at George Wimpey’s The Avenue

An amazing opportunity to own a professionally styled showhome is now available at The Avenue, George Wimpey East Midlands’ sought-after development in Kirkby-in-Ashfield, Nottinghamshire. The four-bedroom ‘Pearl’ housetype has been beautifully decorated throughout by the leading housebuilders’ interior design team.

What’s more, the property comes complete with carpets, curtains, soft furnishings and luxury fittings – a contemporary design ready and waiting for the lucky homebuyer to move straight in.

With proportions perfect for family living, the showhome features a combined breakfast/family room with French doors to the rear garden, a thoughtfully designed kitchen, a separate dining room with double doors to the entrance hallway, a large lounge and a guest cloakroom on the ground floor.

Upstairs, the landing leads to a light and airy master bedroom benefiting from en-suite shower facilities, three further spacious bedrooms, and a separate family bathroom. Outside there is a single garage.

Like all new homes at the development, the ‘Pearl’ enjoys a high standard specification including gas central heating, double glazing and fitted kitchen with built-in oven, hob and hood.

The showhome is priced at £214,995, while a choice of alternative four-bedroom housetypes is also available at The Avenue – the ‘Azalea’, ‘Citrine’, ‘Magenta’ and ‘Magnolia’ designs, priced from £199,995.

The three-bedroom ‘Heather’ and ‘Scarlet’ housetypes start from £136,995.

To help first-time buyers place a foot firmly on the property ladder, George Wimpey will pay their 5% deposit, a saving of thousands of pounds on the cost of owning a brand new property.

Customers who have a property to sell can also save money and time with George Wimpey. The leading housebuilder will cover the cost of their Home Information Pack (HIP) and find a buyer for their current property – guaranteeing 100% of the market value – and pay the estate agents’ fees.

Building on the success of the programme, the housebuilder’s ‘easymover secure’ scheme offers all the existing benefits – with the added incentive of, if you don’t sell your house within 28 days then George Wimpey (with partner Move With Us) will buy it from you!

Customers can also take advantage of the leading housebuilder’s House 2 Home bespoke moving package comprising free UK removal regardless of distance or size of property, full packing and unpacking service and insurance cover.

Kirkby-in-Ashfield is home to an excellent array of independent and high street stores, in addition to a market four days a week, while cosmopolitan Nottingham is within easy reach of the development.

Nearby Nottingham and Mansfield are easily reached by road and the public transport serving the area, and commuters will appreciate the convenient access to the M1 and A60, and the town rail station services to Nottingham, from where there are regular services to London.

The Sales Centre, located in Great Portland Park, Kirkby-in-Ashfield is open seven days a week from 10.30am to 5.30pm. The Sales Executive can be contacted on 0845 688 1377.

Information on George Wimpey developments across the region is available by visiting the web site at Georgewimpey.co.uk.

Getting An Online Insurance Quote

(Best Syndication) Perhaps the greatest influence on our lives this decade has been the worldwide web, which now allows us to do things online which previously we had to do physically. One of such things is getting a home insurance quote, with most people spending hours in front of a computer, online applications have become very popular, the ease involved and the fact that they do not need to study long endless documents or hold endless time consuming discussions is a major factor for searching for home insurance online.

Just a few mouse clicks and a few typed in words in between a hectic schedule and they have information they can study at leisure (however it is still very important that you take the time to understand the basics home insurance before taking out a policy) about what insurance scheme they prefer to invest in.

It is very easy to get an online home insurance quote, as there are a host of websites offering quotes from different insurance companies which you can compare alongside each other, any website you choose to visit online will ask you to fill some forms that cover your personal details and the kind of home and contents you would like insured, and then come up with quotes from top insurance companies in your area.

It is important that you not only look into the value of quotes, but make sure you are dealing with a reputable insurance company that can pay if you ever make a claim. The homeowner policy has been around for a long time and so most of us have a general concept on how the policy works, the more you know about the market value of your house and the approximate cost to rebuild it the better for you when shopping for the homeowner policy.

You might obtain better quotes if you combine your vehicle and home insurance coverage, and give a higher deductible amount than you actually intend to pay. Quotes can also be reduced by seeking coverage only on the building and not the land the building stands. Other elements that will help you get better quotes and discounts are fire extinguishers , alarms and other security systems installed in your home.

Senior citizens and non-smoking homes also get a good discount on their online quote. Usually it is a good idea not to file an insurance claim for little reasons like broken pipes, graffiti, or theft of items that are inexpensive, repeatedly filling claims will increase your premium and you might get blacklisted.

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