The Most Common Do-It-Yourself Estate Planning Mistake
By Attorney Ted Brown
Answer: No. Not unless you (and your children) understand the risks and drawbacks.
In an effort to protect their real estate from nursing home or from estate taxes, many people consider deeding their real estate to their children. This is a very risky strategy for a variety of reasons.
Taxes – By transferring real estate to a child while you are still alive can create a future tax time-bomb for that child.
A gift of property during the owner’s lifetime results in what is known as a carry-over in basis. Basis is the IRS term for the value of the property when you received it, being either the price you paid for it or the value it was worth when you inherited it. Basis is important when the property is sold. The sale price, minus your basis, equals your capital gain which is taxable at roughly 29% between Federal and State taxes.
For example, if you buy a piece of land for $100,000 and you sell it for $225,000, you have a capital gain of $125,000.
So if you have a piece of property that was worth $150,000 when you bought it and now it is worth $400,000, you have a lot of taxable appreciation. If you deed that property to a child, you pass on that taxable appreciation. Moreover, if the child holds onto the property for another 20 years and the value increases to $750,000 then they will owe tax on a $600,000 gain when they sell. This could result in $174,000 being lost to taxes.