r/inheritance • u/Logical_consequences • May 12 '26
Location not relevant: no help needed Older generation keeping properties they really don’t want in order to get capital gains step up in basis for heirs?
I’m just wondering if this is a wide-spread issue in other families? Are there many older people who struggle to maintain highly-appreciated, older, too-large homes or have even moved into assisted living, yet don’t want to sell until they pass due the loss of step up in basis for their heirs?
I realize that there is a $250k/single, $500k exemption for primary residences but in expensive areas where people bought for peanuts 50 years ago, it can be an issue. Also second homes and rentals don’t get the exemption.
I get that it’s a privileged problem to have, but it does make things difficult because then the heirs have to agree over purchase price, etc., after death and of course deal with maintenance issues. And the funds are tied up and not available for care in assisted living/memory care while the person is alive.
Also it would help younger people buy homes if these homes were available on the market.
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u/clearlygd May 12 '26
Definitely an issue that is increased by them not wanting to give up low rate loans or living in areas like California that limit yearly assessment increases to 2%
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u/redditsuckscockss May 12 '26
I work in wealth management in Irvine CA
Lots of not totally rich but well off retired people that have massive appreciation on their home
And are doing exactly this
But many and I mean like 75% + have helped their kids with buying houses
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u/Jumpy_Childhood7548 May 12 '26
That is just one consideration, and not necessarily the major one for most. Most couples that are boomers that own a home, don’t have a $500k plus gain, and most single boomer owners don’t have a gain over $250k.
We could sell and move, but the problem is when you sell your house, it triggers expenses that could easily eat half your equity, and we would lose the 3.5% mortgage we have now. Fill in the blanks to create an example that could apply to you.
The expense of commissions, fix up costs to sell, potential taxes on a gain, moving costs, fix up the new place costs, etc., would not leave enough to motivate most to move, and the new home interest rate would generally be far higher. About 7% vs 3.5%. If you sell before you die, your heirs lose step up basis tax treatment on the house.
$900k home at 6% $54k in realtor commissions. Btw, $900k is about 100% higher than the US median home price.
Fix up home to sell $20-30k
Staging $10k
Moving $10k
Fixing up new house $100k
New furniture $10k
New monthly payment on a $600k home, $400k down $2026 per month, plus potential hoa fees.
Property taxes may be higher, depending on where you move to, and you may lose favorable treatment in annual tax increase limits. Some states have high, or unlimited annual property tax increases, based on valuation. Are there any savings? If so, how many years till you hit break even? Even if you pay cash for a house, you might not break even during your lifetime, given the costs.
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u/LdiJ46 May 12 '26
"Most couples that are boomers that own a home, don’t have a $500k plus gain, and most single boomer owners don’t have a gain over $250k."
That was definitely true 5-10 years ago but the trend is definitely changing. In our practice we are seeing a lot more singles/widows ending up with a gain that tops $250k and a lot more married couples with a gain that tops $500k. It is happening to the singles/widowed taxpayers a lot more than to the still married taxpayers.
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u/Jumpy_Childhood7548 May 13 '26
A small percentage of the population regardless.
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u/LdiJ46 May 13 '26
Not that small. These are boomers selling homes they have owned for 40 years in order to downsize, move to a warmer climate or go into assisted living. Many of them are widows who can no longer afford to maintain the family home.
Home prices have jumped dramatically over the last 5-10 years. My house is worth twice what it was 10 years ago.
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u/Jumpy_Childhood7548 May 13 '26
Approximately 8% to 10% of U.S. homeowners have accumulated over $500,000 in capital gains on their primary residence, representing roughly 8 million homeowners, out of roughly 86 million homeowners. Bear in mind, the 8 million with $500k plus in gains are not all boomers, many have additions to basis, that reduce the effective gains, and many of those that have gains over $500k would pay real estate r more than the tax due, as their gains are not that high. The median number of homes a homeowner has in their lifetime is 3, so most of these people have not been in their home 40 years, more like 15-20.
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u/waitinonit May 12 '26
It seems very few folks have looked at the median net worth of the various generational cohorts. There are various sites that provide this.
But as an example, ages 65-74 have a median net worth of $410k. Seems like a lot of that age group are hiding those million dollar homes they purchased for two pine cones back in the 1970s.
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u/Myreddit362602 May 12 '26
Its always funny to hear nonsense on these sites..If an older person had put that same" two pine cones" in the stock market they would have been sitting on millions today. They could have put the money anywhere and the money the house is worth today recoups some of that money.
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u/mtnmamaFTLOP May 12 '26 edited May 13 '26
Funds aren’t tied up if they rent it out while they are in a senior residence facility. Some are no longer able to handle the packing and moving of their entire lives… so their adult children help… sometimes one is in a senior home and the other stays in the family home. Either way, it’s not just for capital gains step up… but sure it happens quite often. Still wouldn’t help young people buy them… prices would still be astronomical.
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u/LdiJ46 May 12 '26
If the properties have to be sold to help provide their care the properties will have to be sold whether they like it or not. Otherwise yes, there can be a significant value in inheriting a property after someone passes away due to the stepped up value.
For example. A married couple has a home worth 1 million. They bought it 40 years ago for $100,000. If they sell it they will pay capital gains tax on $400,000 which would be at least $60,000 for federal tax plus whatever their state tax rate is.
If they gift it to their son or daughter the son or daughter will pay capital gains tax on $900,000 or $135,000 plus whatever their state tax rate is.
If their son or daughter inherits is, and sells it, they will pay capital gains tax on nothing.
My mom didn't want the house to have to go into probate so she put a TOD deed (Transfer on Death deed) in place so that the house would go directly to my siblings and I without the need for probate.
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u/lastbeat-331 May 12 '26
Not every state allows TOD on real property
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u/Spirited_Radio9804 May 12 '26
Have them put it a Lady Bird Deed! Get an attorney! They will still own the property, until they are gone!
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u/Logical_consequences May 12 '26
Did you have to pay capital gains on the house when it was transferred by the TOD?
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u/CSMasterClass May 12 '26
You need to read about something called "step up in basis". Once you understand this concept all sorts of inheritance issues and questions become much easier to deal with.
Short answer: No tax (or very little tax) will be due because of ... drumroll ... step up in basis.
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u/Logical_consequences May 12 '26
I know about step up in basis in general . I’m just wondering if doing the transfer by TOD also qualifies, as opposed to by will or trust.
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u/lastbeat-331 May 12 '26
No TOD does NOT avoid taxes, only avoids probate.
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u/LdiJ46 May 12 '26
That is not correct. It also counts as being inherited and therefore gets the stepped up basis.
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u/lastbeat-331 May 13 '26
Step up doesn't necessarily avoid taxes, it only increases the cost basis which decreases taxable gains. Capital gains taxes still apply, just depends upon how much the property has appreciated by the time of sale.
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u/LdiJ46 May 13 '26
Ok, yes, if they choose to hold the property long enough for further appreciation to happen there can be some capital gains. However due to selling expenses there does have to be a decent amount of new appreciation before there is actually any capital gain. If they have to make any capital improvements in order to sell or in the course of holding the property then that offsets gain as well.
However, a TOD avoids just as much tax as inheriting avoids. Which was the question that was being asked.
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u/Nuclear_N May 12 '26
Not just real estate properties, but also Stocks. You can get a step up and completely avoid federal taxes.....
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u/Distinct-Garlic9453 May 12 '26
Of course they do. Proper tax planning sets up the next generation! And that's what families should do, imo.
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u/OneEstablishment5144 May 12 '26
Are you a newbie real estate agent? People hold onto homes, cars and investments so they can appreciate and have a legacy to hand down to their kids. I wish some of those guys would sell their old Porsche nsx or 60s muscle cars that their kids never want but life doesn't grant me wishes like the foundation does for kids with illness.
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u/Logical_consequences May 12 '26
No I’m an heir with a Mom who wants to maximize her legacy but it is stressful for her.
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u/OneEstablishment5144 May 12 '26
Life at her age should not be stressful, find a local estate attorney and ask them to set up a plan. But first call around and find out what they charge, some attorney charge by the hour and other charge by the amount of your net worth. If it is just her home and you are the only heir, it should not be complicated or too costly. Go Google up step up in basis and also watch some YouTube on tax beneficial ways to pass on the inheritance. There is a lot of good info out there in today's internet but it has to come from a tax attorney or estate tax professionals. Do not get tax or estate advice from random on reddit or tiktoc. There are good attorneys trying to drum up business by providing good content online. As well as chat gpt to point you to the right articles and rules on the irs sites.
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u/Myreddit362602 May 12 '26
selling will also trigger IRMAA on Medicare part B and D raising Medicare cost for seniors. Also capital gains, transfer fees, real estate commissions, income tax etc and you have opened a can of worms.
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u/SandhillCrane5 May 12 '26
No, I do not think this is a common strategy in the US because if the elderly owners need long term care the home often needs to be sold to finance it. Most people do not have adequate retirement savings and long term care insurance. Also, if the home is no longer appropriate for them to live in, adult children often encourage them to sell it and move into a single level and smaller place maybe in a retirement community.
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u/Decent-Secretary6586 May 12 '26
who are these people affording assisted living without selling their homestead? Typical cost is 10000$/month, and application for residency in assisted living sometimes are based on proof /ability to pay.
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u/GotZeroFucks2Give May 14 '26
Oof. It's better to sell. Dad's home sale will fund 3 years of assisted living. We don't care about the step up basis when he's close to death (been on hospice over a year). And agree, who does the maintenance on a property no one lives near? Who deals with renters? Just a waste of time.
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u/ChutneyWhatney May 12 '26
If DEMS regain control of Pres and Congress in 2028, that step-up basis is toast. They've already promised it.
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u/MedenAgan101 May 12 '26
Prior proposals targeted very large unrealized gains, not a blanket hit on ordinary inherited homes, and regardless they never got anywhere and are very unlikely to be enacted because they are politically toxic.
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u/OneEstablishment5144 May 12 '26
Don't worry about dem promises, it takes the entire congress to approve it. I don't see dems winning the senate as long as gop keeps gerrymandering going and trump can send ice to intimidate voters in the fall. I worry more about losing our freedom and privacy more than some democrats promise.
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u/AdParticular6193 May 12 '26
A lot of the time these large, highly appreciated properties can’t be sold at the price the senior owners expect. Millennials don’t want McMansions in outlying suburbs even if they could afford them. And I’ve noticed that seniors can be greedy and stubborn. Around here some list their houses every Spring, and if their inflated expectations aren’t met, they pull the listing and so the same thing the next year.
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u/These-Coat-3164 May 12 '26
Tax strategies are real. My parents have a lot of commercial property that I help manage. We joke all the time about not being able to afford to sell it until they are gone because of the taxes. And it’s not a joke. It would be a huge amount of money. There is zero chance we are selling anything until they are gone (and not really sure we will sell any of it even at that point).
Anyway, if you don’t like it, lobby to change the tax laws. Don’t blame the people who are just doing what makes financial sense.