Say I pay $50,000 for my house, and it is worth $100,000 at death. Since I've never sold the house, I've never filed capital gains tax on the appreciation.

I leave the house to favorite niece Sue. The value of the house is well under the lifetime gift allowance of $5mil+.

Does the tax man ever get their capital gains tax from the house when it is eventually sold? Is its acquisition price figured at -zero-?

Why would the IRS get tax on the house, but not on a pile of hard cash I might leave Sue instead?

No capital gains on inheritance.. that is the reason for the 5 mill cap

I'm not an expert, but my understanding is that her basis is the value of the house when she takes possession. if you were to gift her the house before death, then her basis would be what you paid for the house

Estate gets a "step-up" in tax basis at date of death to equal FMV at that point. So, the clock restarts as to how much gain/loss there may be down the road. If sold during your lifetime, you can use the gain exclusion rules to exclude up to 500K in gain so long as it was your personal residence for two of the previous five years.

quote:

Originally posted by KDR:
I'm not an expert, but my understanding is that her basis is the value of the house when she takes possession. if you were to gift her the house before death, then her basis would be what you paid for the house

That's true, a donee takes the donors tax basis in the case of a gift. So, gifting the residence before death is a tax trap.

quote:

Originally posted by Sailor1911:

That's true, a donee takes the donors tax basis in the case of a gift. So, gifting the residence before death is a tax trap.

So there is a tax consequence when Sue sells the house, with basis calculated depending on if it was gifted before death or inherited.

And the reason a "cash inheritance" has no basis, just its dollar amount, is because (presumably) I will have sold the house and paid the capital gains to have the cash for Sue to inherit.

For the small amounts used in the hypothetical, there's also a capital gains tax exclusion for primary residences.

quote:

Originally posted by Woodman:

quote:

Originally posted by Sailor1911:

That's true, a donee takes the donors tax basis in the case of a gift. So, gifting the residence before death is a tax trap.

So there is a tax consequence when Sue sells the house, with basis calculated depending on if it was gifted before death or inherited.

And the reason a "cash inheritance" has no basis, just its dollar amount, is because (presumably) I will have sold the house and paid the capital gains to have the cash for Sue to inherit.

If you sell the house during your lifetime, then you exclude the gain under the personal residence exclusion rule presuming you meet the two year residency rule. Then it's cash and cash has a basis of one dollar for one dollar.

If on the other hand, you gift it to Sue and she later sells it, whether you are alive or not, she pays capital gain tax on the difference between the net proceeds and your cost, her donee basis, of 50K. There would also be a gift tax return required unless the 50K gift were spread over multiple years to keep the annual value of the gift below 14K. Although, there would be no gift tax due unless your lifetime estate exclusion (5M+) had previously been used up.

If she inherits the house and it's worth 100K at that time, her basis (stepped up basis) becomes 100K and the capital gain on some future sale is measured from there.

So, remember the old saying about "he who dies with the most toy's wins". Well, the variation for tax purposes is, "He who dies with the most appreciated toy's wins" provided he has adequate remaining Estate tax exemption amounts to use up.

This message has been edited. Last edited by: Sailor1911,

Sounds like the best plan would be for him to just bequeath it in his Will then, correct?

quote:

Originally posted by Cobra21:
Sounds like the best plan would be for him to just bequeath it in his Will then, correct?

Yes, or do a legal step now to retitle the property to a "Transfer on Death" That doesn't result in a current gift because the actual transfer does not occur until death.

- That's a legal process so consult an attorney on it. I am not a lawyer and can't practice law!

It's good to be Sue!
With a stepped up basis.

Remember that Johnnie Cash song, "A Boy Named SUE"?

HI! I'm SUE, how do you DO?

Thanks, I appreciate it.

Last time I payed attention you could roll over profit within a time frame to avoid capital gains, but the exclusion is different. I think before there was the residency requirement, and the first was after two years, with the following every five years.

I'll wade through the publication unless someone knows the answer to something I do not need to know now, but am curious to know: Can I repeat this every five years?

quote:

Originally posted by Woodman:
Thanks, I appreciate it.

Last time I payed attention you could roll over profit within a time frame to avoid capital gains, but the exclusion is different. I think before there was the residency requirement, and the first was after two years, with the following every five years.

I'll wade through the publication unless someone knows the answer to something I do not need to know now, but am curious to know: Can I repeat this every five years?

Residence sale exclusion rule only requires that the property be used as your principal residence in two out of the previous five years. So, that can be repeated every two years.