Transferring the title of a home from one person to another may seem simple but it could have a significant tax implication.
When a person inherits property, the basis is “stepped-up” to fair market value at the time of the decedent’s death. On the other hand, a gift has a carry-over basis which means that the recipient receives the unrealized gain also.
As an example, let’s say an elderly parent, in an attempt to get their affairs in order, gives their home to their adult child. The rationale might be that they are the sole beneficiary and will get the property eventually. In an effort to settle things early, unnecessary income tax may be incurred.
If the home was purchased for $20,000 and worth $100,000 at the time of transfer, there is a possible gain of $80,000. However, if the adult child inherited the property at the time of the parent’s death, their new basis would be $100,000 or the fair market value at the time of death and the possible gain would be zero.
This is meant to be an example and many other variables could be involved. If you’re concerned about a situation, you should seek specific advice from a tax professional. As always, I’m here to help you as your real estate professional.