giving the house to your kids
Giving the house to your kids while you're alive costs them a tax break they only get by inheriting it, and it applies to anyone who owns a home, land, or stock they plan to pass down.
The break is the basis reset.
Your cost basis is what you paid. When you sell, you owe capital gains tax on the difference between that number and the sale price.
When you die, what you own gets revalued at that day's price. Your kids' basis becomes the current value, and all the growth that happened while you owned it is never taxed.
Give it away while you're still here and none of that happens. Your kids take your original purchase price as their basis, and they owe tax on every dollar of growth since you bought it.
The math:
You bought the house for $200,000 and it's worth $500,000 today.
Deed it to them now, they sell, and they pay capital gains tax on $300,000 of growth. At the 15% long-term rate that's $45,000, plus a 3.8% investment income tax on top if their income is high enough.
Leave it to them in your estate and their basis resets to $500,000. Sell at that price and the taxable gain is zero.
I've been buying real estate for 12 years, and the price I paid on a deal back then is still the number that sets the tax bill whenever it sells, which is exactly the number you hand your kids when you deed them the house early.
The longer you've owned it, the more the gift costs, because the growth you never paid tax on is exactly what disappears.
If you want the house to end up with your kids, the cheapest path is usually to leave it in your estate and let them inherit it. Talk to an estate attorney before you sign any deed.
As promised, income over wealth in under a minute.
- Dan
The break is the basis reset.
Your cost basis is what you paid. When you sell, you owe capital gains tax on the difference between that number and the sale price.
When you die, what you own gets revalued at that day's price. Your kids' basis becomes the current value, and all the growth that happened while you owned it is never taxed.
Give it away while you're still here and none of that happens. Your kids take your original purchase price as their basis, and they owe tax on every dollar of growth since you bought it.
The math:
You bought the house for $200,000 and it's worth $500,000 today.
Deed it to them now, they sell, and they pay capital gains tax on $300,000 of growth. At the 15% long-term rate that's $45,000, plus a 3.8% investment income tax on top if their income is high enough.
Leave it to them in your estate and their basis resets to $500,000. Sell at that price and the taxable gain is zero.
I've been buying real estate for 12 years, and the price I paid on a deal back then is still the number that sets the tax bill whenever it sells, which is exactly the number you hand your kids when you deed them the house early.
The longer you've owned it, the more the gift costs, because the growth you never paid tax on is exactly what disappears.
If you want the house to end up with your kids, the cheapest path is usually to leave it in your estate and let them inherit it. Talk to an estate attorney before you sign any deed.
As promised, income over wealth in under a minute.
- Dan
