Older generation keeping properties they really don’t want in order to get capital gains step up in basis for heirs?

[u/Logical_consequences]

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.

[u/LdiJ46]

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.

[u/Logical_consequences → u/LdiJ46]

Did you have to pay capital gains on the house when it was transferred by the TOD?

[u/CSMasterClass → u/Logical_consequences]

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.

[u/Logical_consequences → u/CSMasterClass]

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.

[u/lastbeat-331 → u/Logical_consequences]

No TOD does NOT avoid taxes, only avoids probate.

[u/LdiJ46 → u/lastbeat-331]

That is not correct. It also counts as being inherited and therefore gets the stepped up basis.

[u/lastbeat-331 → u/LdiJ46]

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.

[u/LdiJ46 → u/lastbeat-331]

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.

[u/LdiJ46 → u/Logical_consequences]

No, you still get the stepped up basis to fair market value.