Estate Tax Question
Question:
For minimizing taxes for inheritance purposes, are there tax advantages for holding property through death and the estate settlement versus selling property prior to death?
I'm looking at acquiring a group of 4 rental properties. Mom, who is in her 90s and in a nursing home is owner. Daughter who I'm dealing with is now suggesting they wait on the sale until after mom passes becasue of the estate tax advantage. I'm not seeing her logic here, and see two types of taxes - estate and, as all houses have been owned by mom for many years, cap gains. Clearly if mom sells now, she has cap gains tax to contend with. If the daughter waits for the houses to come to her via inheritance, doesn't she still have to pay the gains tax at the sale? If so, I'm seeing this as mom paying the cap gains now or daughter paying the cap gains later, but I can't see this being avoided. Also, does daughter have to hold the houses in her name for one year for this to be cap gains instead of ord income, or because of inheritance the ownership period is not an issue? And assuming cap gains is paid either way, is there any advantage for mom passing daughter houses vs cash for estate tax purposes?
Thanks for the help.
Basis gets stepped up to fair market value after death (meaning no capital gains, or perhaps just a smidgen by the time sale can be effected). The estate will have in excess of $600k of value it can pass tax-free, as long as there haven't been gifts during life that eroded this amount. Above that, there is tax at graduated rates. Likely, nearly all of this "unified credit" will still be available at death.
If you need to get your hands on the property now, I'd say a long-term lease with an option would be a good idea. You can exercise the option after death, when it will cost little or nothing in taxes for the estate. [ Edited by flacorps on Date 10/20/2003 ]
Quote:For minimizing taxes for inheritance purposes, are there tax advantages for holding property through death and the estate settlement versus selling property prior to death?JohnI,
flacorps is basically correct, except that the unified credit for federal estate taxes is $1,000,000 in 2002. This means that the first $1,000,000 of your mother's estate can pass to her heirs free of federal estate taxes. For 2002, federal estate taxes would apply to amounts over $1MM. Of course, state inheritance taxes may have their own schedule of unified credits that may not parallel the federal rules.
Until the end of 2009, inherited property takes its cost basis from the appraised value at the time of the inheritance. If your sister inherits all the properties, then she is free to sell to you at the (then) appraised value without any capital gains tax.
If you inherit the properties directly, your basis becomes the appraised value at the time of the inheritance. When you decide to sell the properties, your taxable gain will be based upon your cost basis, not your mother's original basis.
Under the current law, the stepped up basis goes away in 2010, but so does the estate tax. Inherited property will retain its original cost basis, but federal estate taxes go away.
You are correct that if your mother sells now, the property will incur capital gains taxes. [ Edited by DaveT on Date 10/20/2003 ]
Quote:flacorps is basically correct, except that the unified credit for federal estate taxes is $1,000,000 in 2002.
It's been jumping faster than I thought ... I remembered the first year it jumped it went up to something wacky like $692,000.
Filing requirement. The following table lists the filing requirement for the estate of a decedent dying after 2001.
Year of Death: Filing Requirement:
2002 and 2003 $ 1,000,000
2004 and 2005 1,500,000
2006, 2007, and 2008 2,000,000
2009 3,500,000
http://www.irs.gov/formspubs/page/0,,id=12907,00.html
The moral of the story is if you're rich, die in 2009!
Imagine all the beneficiaries of very large estates who hold medical power of attorney directing doctors to pull the plug in 2009. I wonder if we will see a dramatic increase in life support termination cases in 2009.
Quote:
On 2003-10-20 16:40, DaveT wrote:
Imagine all the beneficiaries of very large estates who hold medical power of attorney directing doctors to pull the plug in 2009. I wonder if we will see a dramatic increase in life support termination cases in 2009.
This has the making of a Phil Hendrie Show bit. (www.philhendrieshow.com). The only tough part of the bit would be figuring out which of Phil's wacky characters would want to do it to a relative! My vote would be Ted Bell, but Vernon Dozier or even Steve & Bobbie Dooley come to mind. Of course, we may have to wait till '08 or so!