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Is it better to gift or inherit property?

Capital Gains Tax Considerations It's generally better to receive real estate as an inheritance rather than as an outright gift because of capital gains implications. That's because of cost basis, which is cost of the property used to determine the capital gain, if any, when it is transferred. 4 days ago

thebalancemoney.com - Selling Gifted Real Estate Can Have Capital Gains Tax Consequences

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Gifting real estate can come with a few disadvantages from a tax perspective, depending on what the recipient does with the property. A capital gains tax can come into play. Some tax professionals advise that people never give real estate. That might be a little extreme, because there are some scenarios where it can be a smart tax move, but there are many considerations, depending on how and when you're giving the gift. Key Takeaways Two tax considerations come into play with gifted property: the estate tax and capital gains tax. Estates must pay tax on estates valued at more than $12,060,000 for deaths that occurred in 2022 ($12,920,000 for deaths in 2023). Capital gains taxes are determined by the property's cost basis, which is the value of the asset when purchased (if given as a gift) or when transferred (if inherited).

Effect of Estate Taxes on Inherited Property

The executor of a decedent's estate will typically value all the property owned by the individual as of the date of death, then do so again six months later. The executor can then use the valuation that results in the least possible estate tax consequences—the lesser the value, the better. The goal is that the estate's entire value will be less than the year's federal estate tax exemption so no estate tax will be owed. Estates must pay the federal estate tax on values over $12,060,000 for deaths that occur in tax year 2022. For 2023 the exemption is $12,920,000. The majority of estates are never subject to this tax because the exemption is so high, but this could change if the exemption drops significantly, as it might when the Tax Cuts and Jobs Act expires after 2025.

Capital Gains Tax Considerations

It's generally better to receive real estate as an inheritance rather than as an outright gift because of capital gains implications. That's because of cost basis, which is cost of the property used to determine the capital gain, if any, when it is transferred.

When Real Estate is Inherited

Your cost basis in the property as an heir would be the fair market value of the real estate on the executor's chosen valuation date, not its initial purchase price when the decedent acquired it. The executor may also choose to use the date of death as the basis valuation date. Either way, this adjustment is called a "stepped-up basis," and it's an excellent way to minimize your capital gains tax liability if you decide to sell the property after you inherit it. Note The deceased probably paid much less for the property than its fair market value in the year of death if they owned the real estate for any length of time.

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As an example, you'd have no capital gain if the decedent gave you real estate worth $350,000 as of the estate's valuation date and you immediately sold that property for $350,000. But you'd have a capital gain of $250,000 if you inherited the deceased's tax basis and they bought that property for $100,000 decades ago and gave it to you as an outright gift during their lifetime: the difference between the $100,000 basis and your sales price. The greater the estate tax valuation, the less amount of profit will be subject to capital gains tax if you should decide to sell the real estate.

When Real Estate Is Given As a Gift

Your cost basis would be the same as the donor's cost basis if you received the property as a gift during the donor's lifetime because there's no step-up in basis. If the donor purchased the property for $100,000, then your cost basis would be $100,000, even if the property is now worth $350,000. Note Review your "adjusted cost basis" in the property as well, because your cost basis can be reduced even more by any depreciation the donor might have claimed or could have claimed as tax deductions over the years. Again, the lower your basis is, the greater your gain will be if and when you sell the home.

Long-Term Capital Gains Tax Rates

You'd pay a long-term capital gains tax on the difference between the cost basis and the sale amount if you owned the property for more than a year before selling and you earn more than certain thresholds. Below these thresholds, you'd pay no capital gains tax.

thebalancemoney.com - Selling Gifted Real Estate Can Have Capital Gains Tax Consequences

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