3/28/2005
Advice from Nashville's leading Financial Aid Advisor Dave Ramsey
Dave Says
By Dave Ramsey
Author of:
Financial Peace and
The Total Money Makeover
"Brother wants to avoid tax hit on mother's home?"
Dear Dave,
Six or seven years ago, my mother deeded her house to my brother and me with a
life estate in it. Now my brother has decided that he would like to be the sole
owner of the house, which is fine with me. We don’t know how to go about
transferring to him the part I own without me incurring a big tax hit. My half
of the house is probably worth $50,000, which is about how much she paid for the
whole house when she bought it.
Elizabeth in Louisville, KY
Dear Elizabeth,
It sounds like you both want him to buy your portion of the house. Whoever did
this estate planning didn’t do it correctly. When she deeded the house to you
and your bother, her basis – what she paid for the house originally – became
your basis, for tax purposes. In other words, if she paid $50,000 for the house
and you now sell it for $100,000; you and your bother will each have taxable
capital gains of $50,000 – that’s $25,000 each. Capital gains are taxed at 15%,
so you would each owe around $3,750 if you sold the house today for $100,000.
If the estate planner had, instead, had your mother will the house to you at her
passing, your basis would have been what the house was worth at the time of her
death and your capital gains taxes, for this transaction, would have been zero.
Instead, you have to pay a tax, if you do this deal, and he still doesn’t have
use of the house because life estate means that Mom gets to live there for the
rest of her life – or as long as she wants to. So he may own a house that he
can’t sell or use for a long time.
Now, you might be able to deed the house back to your mom and have her will the
house to you upon her death. That might very possibly undo this situation.
However, I strongly suggest you consult a good estate planner, who can take a
look at your whole situation, and don’t just take my word from this quick
exchange.
-Dave
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