Dear Liz: You are recently wrote Regarding the relationship between the capital gains tax when selling the inherited house and when selling the inherited house. If the person has a large fortune, could you elaborate on the impact of the donor’s wealth? Will their estate pay taxes on the gift?
answer: Few people need to worry about either gift tax or inheritance tax, for reasons that will soon become apparent. However, large gifts can potentially reduce the amount that wealthy donors can pass tax-free to their heirs after their death.
that is, Gift tax/inheritance tax system be combined. Giving in excess of the annual deductible ($17,000 per recipient in 2023) reduces the donor’s lifetime gift and estate tax exemption amount, which in 2023 he is $12,920,000.
Let’s say a donor gives a friend a $1 million house. Any amount in excess of her $17,000 annual limit or her $983,000 will be deducted from the donor’s lifetime limit. If the donor dies in her 2023, their estate in excess of $11,937,00 will be subject to estate tax. (The giver is obligated to pay the gift tax only after the lifetime limit has been exhausted due to too much gift tax.)
Receiving property as a gift also means that the recipient may face more taxes than if they inherited the property.
of the aforementioned column When someone inherits a home, the home’s tax base is “stepped up” to its current market value. This means that valuations that occur during the life of the previous owner are not taxed.
Another rule applies if someone is given a home by a still-living donor. No price increase. Recipients typically receive the donor’s tax base, which is the amount the donor paid for the home, plus eligible improvements.
When the home is sold, that basis is deducted from the proceeds to determine the profit that may be taxable. Recipients may face capital gains tax on valuations accrued since the original owner purchased the home.
Meanwhile, transferring assets for life is one way to manage the size of your potentially taxable estate, says a Los Angeles estate planning attorney. Burton Mitchell. For example, when a house is transferred, future appraisals do not increase the donor’s wealth.
Of course, anyone with a property large enough to worry about these taxes should consult a real estate planning attorney about the best strategy for their situation.
Liz Weston is a certified financial planner and personal finance columnist. nerd wallet. Questions can be directed to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or by using the “Contact Us” form below. asklizweston.com.
