Real Estate Matters: Is it better to transfer a title now or go through probate in the future?
As far as the home is concerned, you have various options and decisions to make. If the home has appreciated substantially over the years, you might want to keep the home in her estate to minimize any taxes you might have to pay when you sell it.
Let’s say she has a profit of $250,000 if she were to sell the home today. Under current tax laws, she can exclude from tax up to $250,000 in profits from the sale of the home. (This exclusion is for the sale of a primary residence that the owner has lived in for two out of the last five years.)
Now, if she signs a quitclaim deed for the home to her kids today, the IRS will look at this as a gift to the three of you. Her cost basis in the property (what she paid for the home plus any material or structural improvements she has made over time) will be transferred to you. But, when you go to sell the property, you wouldn’t benefit from the $250,000 exclusion. This means that you and your siblings may have to pay federal income or capital gains taxes on the sale of the home (and this may also increase the state tax you pay, depending on where you live).
On the other hand, if the home is still in her estate when she dies, you and your siblings will inherit the home at the stepped-up basis. This means the home’s value (for estate tax purposes) will rise to the current market value at the time of her death (as opposed to what she paid for it), so if you turn around and sell it immediately, there wouldn’t be any profit and you wouldn’t have any taxes to pay.
One final thought: In some states, you can use a transfer on death deed that would allow the property to transfer automatically to the kids upon her death. You and your siblings would inherit the property at the stepped-up value.
Trusts and transfer on death deeds will cost you something to set up. The question for the estate attorneys is this: How does that cost compare to the estimated cost to probate her estate? If it’s going to cost you $2,500 to set up a trust or prepare a different deed, and $10,000 to probate her estate, then you should pay for the trust or deed now.
Here’s your plan of action: Take a 30,000-foot view of your mom’s assets, talk to estate and tax experts, talk with your brother about whether he will ultimately want to buy or live in the home, and then share your findings with your mom. She sounds sharp and will want to make sure that the work she has already put in to prepare her estate satisfies everyone.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)
© 2020 ILYCE R. GLINK AND SAMUEL J. TAMKIN. DISTRIBUTED BY TRIBUNE CONTENT AGENCY, LLC.