Should you leave your home to your children in your will?
3. Do your children get along well?
The median price of homes in the United States – half lower, half higher – is $ 319,200. If you have multiple heirs and bequeath them a house worth several hundred thousand dollars, it can be difficult for them to agree on what to do with it.
âIf the children are geographically far from the home, which is more common today, it can cause dissension among beneficiaries – especially if one of them is doing all the maintenance – because they cannot not fully enjoying the home provided as a legacy, âsays Gregory Giardino, CFP in Hawthorne, TX.
4. What is the title of the house?
Rules vary from state to state, but for many married couples, a home is typically held in a condominium with right of survivorship (sometimes referred to as a full tenancy), which means if one of the spouses dies , the other owns the house entirely. If both spouses die at the same time, the ownership of the house is decided by the stipulations of their will (or, in the absence of a will, by state probate laws).
It will also be important for the heirs to determine how the house will be titled and how the property will operate. What if one heir wants the money and the other two want the house? In this case, the heirs who want the house will have to buy back the one who does not want it, either in cash or through an intra-family financing contract. The last resort, of course, would be the court system, which is usually not the best place to form family ties.
Finally, are there any liens on the home for debts owed, such as tax arrears or overdue loans, that would be due when the ownership of the property changes? âChildren are often surprised to learn this,â says Patricia Hausknost, CFP in Long Beach, California. âIf they exceed the value of the house, it’s best to notify the first lien holder of the death and walk away. “
5. What is the tax situation?
Uncle Sam wants a share when a house is sold for a profit. The amount of the reduction comes down to what is called the base cost of ownership. Simply put, you are taxed on the difference between what you paid for the house and what you sold it for. But it is not that simple. For tax purposes, you can also add the value of certain expenses, such as major renovations, to the purchase price of the home to increase your base costs and thereby reduce the amount of profit you owe taxes on. Confuses? The IRS has a lot more to do with calculating the cost base.
The heirs get a break based on the costs. Under current law, when a person inherits a house, they get what is called a base mark-up, which means their cost base for taxes is on the date of their parents’ death or settlement of the estate. In other words, if they sell the house, the heirs won’t have to base their capital gains tax on what their parents paid for the house. Suppose the parents bought the house for $ 50,000 in 1980 and the house was worth $ 319,200 on the day the estate was settled. The heirs would have no profit on the house if they sold it immediately, and therefore no capital gains tax is due.
Parents could also sell their home today, and under the current tax code, $ 250,000 of profits will be excluded from capital gains for each person, which means a $ 500,000 exclusion from earnings for a married couple. . Some parents are tempted to transfer title to the house to their children while the parents are still alive. “Do not do it!” said Hausknost. The heirs will be responsible for the expenses of the house, including civil liability, and they will not get the gross-up base.
It should also be noted that a feature of President Joe Biden’s current tax reform proposal is the elimination of the base markup. âFrom a financial point of view, without the mark-up rule, it would make little difference whether the original owner left the house to the heirs or sold it himself,â says David Silversmith, CFP in Plainview, New York. . “But under the current law, I would advise my clients to keep the house and leave it to their heirs.”