my name is jen ross from finance on a
budget in this video we'll go over the
various steps of inheriting a house
and the various tax implications of
doing it prematurely
there are many different ways to inherit
property and pay
lots of taxes but there are actually
ways of doing it that significantly
lower your tax burdens
by the end of this video you will know
how to successfully take control of
property and minimize the amount you're
going to owe to the government
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bell what are the tax implications of
controlling a house
before death if you're like me
you may be thinking that you want to
take control of your parents assets
right now even if you're not legally
bound to do so
this can lead to a lot of tax
obligations for you
in the same way giving away your assets
to your children while you're still
living just gives a hefty tax burden to
them
if you think transferring assets now
will keep the court from controlling
assets once a parent becomes
incapacitated
and avoid probate remember that giving
someone other than your spouse more than
fourteen thousand dollars in a year
entails a gift tax if you were to sell
your parents asset
you will be slapped with a hefty capital
gains tax
this is because you didn't really
receive the asset as an inheritance upon
death
so there are no shortcuts here for
example
if your parents bought a house for one
hundred thousand dollars or even less
many years ago and it appreciates to 350
000 today you might think that you can
sell it for 350 000
but because the title was transferred
while your parents were still alive
the house will keep your parents
original cost basis of one hundred
thousand dollars
which means a two hundred and fifty
thousand dollar gain on the sale
you will then need to pay at least fifty
thousand dollars in capital gains tax
yes i said fifty thousand you might also
have to pay an additional 3.8
net investment income tax depending on
your other income and filing status
on the flip side if you get a house as
an inheritance instead of a gift
then you will receive a new stepped-up
basis in the market value
which looks at the date of death of your
parents
let's say that your current market rate
upon death is 350 thousand dollars
when you sell the house for 350 000
there are no gains
so no capital gains tax either pretty
big difference right
do i have to pay tax on a house that i
inherited
there is no federal inheritance tax so
most of the time you won't have an
immediate tax liability after inheriting
property still financial and legal
responsibilities depend on a variety of
things
like existing debt obligations you may
have such as the mortgage
you'll also need to consider the current
condition of the property as well as how
much it's going to cost you to spend
on upkeep and maintenance normally a lot
of mortgages can be assumed by the
errors
so you can take over any payments or
remaining payments based on the terms of
the original loan
however for reverse mortgages the unpaid
balance will be due on sale
or when the mortgagor passes away this
means that the heirs are now required to
sell the property in order to settle the
debt
the moral of this story is to avoid
reverse mortgages at all costs
while i understand that elderly can see
this as a way to make ends meet
when social security just isn't enough
but the banks will always screw over
their customers in the end
banks are evil don't give them your
money what to do with the inherited
property
obviously you need to check on the
condition of the house if it's going to
cost you a huge amount of money just to
improve a house
that hasn't been maintained then you
might want to consider selling the house
instead of repairing it and keeping it
for yourself
if you share ownership of the inherited
house with siblings
it's important to get everyone's opinion
on the matter to avoid complications
if you decide to sell the house you may
need to pay short-term or long-term
capital gains taxes
if you profited on the sale of the
property based on the current market
values at the time of death
if you decide to move into the house you
can make use of the capital gains
exclusion in future
once you decide to sell it later down
the road for now
you'll need to repay any debt taxes and
property insurance if you've moved in
there's always the option of renting the
home but you need to be sure that you
know how to run a business as a landlord
and that you have experience with real
estate at the very least
for me personally i was a landlord three
times
my first was uneventful the second had
two tenants that stopped paying the rent
and eventually went into foreclosure the
third was filled with melodrama that had
one of the three tenants dropping water
absorbing balls down the drain
leaving me a big mess to clean up and
eventually damaging the water heater
causing massive damage to the basement
so no i'm not big on being a landlord
i'll cover that in a future video what
if you're the current owner of the
property
if you're the original homeowner you
have lots of options
for pre-death transfers like selling
your home to the children
doing so means that you can sell the
property to your errors at fair market
value
because of a bargain sale will mean that
the property can be considered a gift
which will generate tax implications
giving your property away on the other
hand
is better done through a revocable
living trust so that you have the option
of changing your mind in the future
also gifting a property will trigger a
do on sale clause where you will be
required to pay the mortgage in full
right away also if your heir gets to
financial trouble at any point the
property could actually be foreclosed on
in a bankruptcy
so you could always run that risk
gifting the property deed to the
children
does nothing to transfer the debt of the
mortgage parents must either keep paying
the mortgage or have the children
refinance the loan in their own names
but as i already mentioned this is
likely a bad idea
depending on your state you can also do
a deed transfer which works like a
payable on death
designation for your bank account you
can use this to transfer assets with the
added flexibility of being able to
change designations at any time
while avoiding probate at the same time
transferring ownership before death
lets you pass the land without the
probate process
plus it can also help you qualify for
medicaid while avoiding the medicaid
estate recovery program in the future
however
you need to remember that once the
property is deeded you no longer have
any control over the property
you can't take back that transfer either
nor can you avoid potential negative tax
consequences related to capital gains
taxes
because you passed on the property
before death the errors can't receive a
step
up basis for the capital gains tax
purposes
of course there's also more there's this
thing called medicaid transfer penalty
which is triggered when you transfer
property for less than fair market value
within the last five
years rendering you ineligible to
qualify for medicaid for a period of
time
i tried to keep this video short but
there is a lot to unpack here
there are definitely pros and cons to
the various ways of approaching this
so it's best to discuss the matters with
the tax consultant
and your family members before making
any important decisions
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thanks for watching