My parents, age 84, own their house with no mortgage. Its market value is about $600,000. They want to transfer ownership on the deed to me and my sister before they pass away. We’re already in their will as co-beneficiaries. Would it be beneficial for them instead to sell the house in their name, and reap the tax-exemption benefit on the sale?
The status quo actually has potential tax benefits for all of you.
If your parents need to sell the house, they’ll get a tax exemption on the first $500,000 of their profit because it’s their primary residence — i.e., a house they’ve owned and have lived in for two of the last five years. If you and your sister were listed as the owners, the sale proceeds wouldn’t qualify for that exemption because the house isn’t your primary residence.
If they don’t sell the house, you and your sister will inherit it at its market value — so when you sell it, you’ll owe taxes on the profit only to the extent that it exceeds that value. If the house is worth $700,000 when you inherit it and you later sell it for $750,000, for example, only $50,000 will be taxable.
Perhaps your parents worry that in the future they may need Medicaid nursing home assistance, which might let Medicaid put a lien on the house to recover the money spent on their care after their deaths. If so, they should consult an elder care attorney who can explain the trade-offs — and the cost — of sheltering the house from potential Medicaid claims by putting it into an irrevocable trust, or transferring it to you and your sister while retaining a life estate for themselves. As always, families should consult a professional to determine what plan would work best for them.
THE BOTTOM LINE The optimal estate plan depends on what you want to accomplish.
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