Property Inheritance and Tax Questions

[pc95]

Hi, Questions on inheritances, I've read that if you would like to inherit your parent's house tax free solely from your siblings, you must have your parents re-structure their will/trust to soley give you the house and in exchange you must re-compensate your sibling(s) equal amounts of the differences in their shares. For simplicity sake, an example, lets say your parent's house is appraised at $200,000 and you have one sister, and that your parents plan to leave the majority of their estate to you both. Given your sister and parents agree, you would gain the house, give your sister $100,000 of your portion of estate after the time of death assuming the estate was larger than $400,000. If not, you would owe some amount to your sibling, and need to have some sort of arrangement to pay the money back. Does this sound true? If there is lack of agreement, the sensible course may be to sell the property, or perhaps rent it out. If you wait to try to work out details after the parents die, you would owe property taxes to sister if buying her share. Is this correct? I actually have 2 siblings and live in CA which complicates the situation a bit. Luckily our parents have been fairly transparent about their trust. They are in their mid-70s, and have spoken to us at length about what their plan (trust) is: equal shares of the house, money, equities, and miscellaneous grouped out evenly. We (wife/I) are the oldest and in best financial shape of siblings, and would like to discuss with parents/siblings about the house, but are unsure about broaching the subject especially to younger siblings as do not want to cause a rift. Thoughts? Thx.

Some variation:
A coworker has told me there's been some bad blood in their whole family as his wife's grandparents has selected to give their entire estate to her (their grandchild) rather than their children. In this cace the rancor is from one of the Aunt/Uncle..

[pb4uski]

There is no "you must".... a decedent can distribute their assets equally or unequally, however they wish to.

However, it is common that parents seek to distribute assets equally to their children. In this case, think of it as your buying the house from the estate. So let's say that there are 3 heirs and the estate is $700k including a house valued at $200k. If you sell the house and distribute the proceeds then each heir gets $233k. If you "buy" the house from the estate for $200k and then receive $233k from the estate it is the same as if you get the house and $33k then the other two get $233k each.

Or if the the estate is $500k including a house valued at $200k if you sell the house and distribute the proceeds then each heir gets $167k. Alternatively, If you "buy" the house from the estate for $200k and then receive $167k from the estate it is the same as if you get the house and pay $33k and then the other two get $167k each.

[The Cosmic Avenger]

And that's why it's best to discuss these things before the will is probated. It's possible that all the siblings' desires will align, and one will want property more than money, and the other(s) will want money and not real property. But if not, it's easier to compromise or come to terms with not getting exactly what you want when you're not grieving.

But it sounds like you may be wondering whether it's better for tax purposes to work this out beforehand rather than buy out your siblings' shares. Maybe someone else can weigh in on that, but I don't think it would matter, because of the stepped up cost basis.

[pb4uski]

Quote:

Originally Posted by The Cosmic Avenger .... But it sounds like you may be wondering whether it's better for tax purposes to work this out beforehand rather than buy out your siblings' shares. Maybe someone else can weigh in on that, but I don't think it would matter, because of the stepped up cost basis.

+1 I was thinking the same... doesn't matter because of stepped-up basis.

[N02L84ER]

As far as the property tax, the estate should owe any accrued tax up to the date of death. If it took a year to settle the estate and the estate was to be divided equally among the 3 siblings, then any earnings on the investments would be divided equally and any accrued property taxes should be divided equally regardless of how the investments and property were ultimately divided assuming the final total inheritances were basically equivalent. IMO. YMMV.

[RunningBum]

Are you planning to flip the house? I'd expect a lot of resentment from siblings if you low-ball it to them, and sell a few months later at a big profit. Get an unbiased appraisal on it, maybe let them choose the appraiser, even if you plan to live in it, or rent it out. I could see taking out the would-be selling fees. I don't see how they could object to that, as long as it works out that you are splitting the estate evenly according to the will, then you pay them for their shares of the house instead of the estate selling it to someone else. As long as the numbers work out that they get the same net amount whether the house is sold to someone else or transferred to you.

I don't see a tax question in here?

[N02L84ER]

Quote:

Originally Posted by RunningBum I don't see a tax question in here?

I saw this tax question.


"If you wait to try to work out details after the parents die, you would owe property taxes to sister if buying her share. Is this correct?"

[RunningBum]

Quote:

Originally Posted by N02L84ER I saw this tax question. "If you wait to try to work out details after the parents die, you would owe property taxes to sister if buying her share. Is this correct?"

Oh, OK. Yeah, just like if you bought a house from someone and owed prorated taxes for the amount they paid in advance that falls in the time frame after the sale, you would owe that back to the estate, and the sister would get her share. I'd guess that's be a pretty negligible amount, though it could be a few thousand if it falls early enough in the property tax year.

[pc95]

Quote:

Originally Posted by RunningBum Are you planning to flip the house? I'd expect a lot of resentment from siblings if you low-ball it to them, and sell a few months later at a big profit. Get an unbiased appraisal on it, maybe let them choose the appraiser, even if you plan to live in it, or rent it out. I could see taking out the would-be selling fees. I don't see how they could object to that, as long as it works out that you are splitting the estate evenly according to the will, then you pay them for their shares of the house instead of the estate selling it to someone else. As long as the numbers work out that they get the same net amount whether the house is sold to someone else or transferred to you. I don't see a tax question in here?

No, wasn't planning to flip the house. The 1978 Prop 13 in CA caps the property tax, and property values are bonkers now again in many CA areas including my parents area, so was interested in the long-term shield of the proposition. If going through this, I would not want to create a situation where a home sale goes through for the house (from my siblings to me) resetting the prop 13 rate to a huge increase due to the new appraised value and sale. The house was bought in 1979 in a relatively desirable location. As a sign of the whacky times, it is very expensive on zillow as is much real estate (imo) (~ 7x what my parents bought it for currently supposedly). I'm trying to avoid the double-whammy (large selling price and large uptick in tax). My understanding, if a property "sale" occurs the new tax rate locks in; for this case its around 4x the tax rate what my parents currently pay in taxes. Can there be a transfer of ownership in-house even after payout of shares without triggering the tax rate reset? Whenever "payments" are involved I think "taxes". What complicates the matter a bit is neither of my siblings are in a financial position to do this themselves, so I dont know how they'll perceive it --actually I'm fairly sure one would be ok, but don't know about the other). I dont think either of them want to sell the house either, which is why I wonder about the response.

[pb4uski]

I see now.... if you inherit the house then you also inherit the favorable property tax base. So ideally you would inherit the house and get less cash/securities and they would get more cash/securities and it would all even out.

It sounds like your sibling are in a position where inheriting more cash/securities would be better for them.... you might broach the idea with your parents and explain why. If it were me, I would be fine with it as long as the total value of what each child gets is similar.

[Another Reader]

The only transfers that are exempt from reappraisal under Prop 58 are direct transfers from parents to children. If you buy out your siblings, that is not a parent to child transfer. The percentages you acquire will be revalued at current market value. Please see an attorney versed in the rules under Prop 58 to insure the property is not revalued when you acquire it.

[pc95]

Quote:

Originally Posted by Another Reader The only transfers that are exempt from reappraisal under Prop 58 are direct transfers from parents to children. If you buy out your siblings, that is not a parent to child transfer. The percentages you acquire will be revalued at current market value. Please see an attorney versed in the rules under Prop 58 to insure the property is not revalued when you acquire it.

Thanks 'Another Reader', that was my suspicion. In other words, the only way to inherit the house outright without the tax revalue would be to bring up and agree on the subject directly to my parents (and siblings) now (before parents passing away). After that, it would be subject to large tax rate increase. My siblings are likely not thinking about the tax implications of it (at least now), but if I decide to inquire, I will discuss it in transparency. There is an element of unfairness or financial unequal benefit to it. One of my siblings has their own house, the other does not. I am the oldest, with no children. I do not want financial perceptions to drive wedges in our relationships. It is a financial inquiry, but there is a bona fide personal aspect to it. I figure inquiring at least to parents shouldn't hurt, but am not dead set on the house in any event; it isn't worth relationship disruptions. If I do not inquire or no agreement, I will likely not try to purchase the house from siblings after the fact, with tax rate increase.

[wolf]

Quote:

Originally Posted by pc95 No, wasn't planning to flip the house. The 1978 Prop 13 in CA caps the property tax, and property values are bonkers now again in many CA areas including my parents area, so was interested in the long-term shield of the proposition. If going through this, I would not want to create a situation where a home sale goes through for the house (from my siblings to me) resetting the prop 13 rate to a huge increase due to the new appraised value and sale. The house was bought in 1979 in a relatively desirable location. As a sign of the whacky times, it is very expensive on zillow as is much real estate (imo) (~ 7x what my parents bought it for currently supposedly). I'm trying to avoid the double-whammy (large selling price and large uptick in tax). My understanding, if a property "sale" occurs the new tax rate locks in; for this case its around 4x the tax rate what my parents currently pay in taxes. Can there be a transfer of ownership in-house even after payout of shares without triggering the tax rate reset? Whenever "payments" are involved I think "taxes". What complicates the matter a bit is neither of my siblings are in a financial position to do this themselves, so I dont know how they'll perceive it --actually I'm fairly sure one would be ok, but don't know about the other). I dont think either of them want to sell the house either, which is why I wonder about the response.

PC95. I also live in CA. SF Bay area. Have same issue. Would like to keep Mom's house after she passes, but not sure how siblings would react to my proposal. I understand exactly your concerns. Prop 13. And goal of keeping the existing property tax.

This info. may help:

1. A purchase triggers prop 13 re-appraisal (property tax increase). So if you "buy" out your siblings. There will be a new appraisal.

2. Terms of the Trust may also be an issue. Wife's case. Her mom's trust
said 50/50. Wife kept moms house. Only sibling, her brother kept cash.
Because house was appraised about $100K more than available cash,
Wife had to "buy" out brother's share. $100K. So property was reappraised
for $100K. Tax increase only on the $100K ! So not to bad.

3. Also, in wife's situation. Santa Clara County, CA. Requested a copy of
mom's trust. So even though brother said, I do not want house, and it does not have to be 50/50 split, I do not want $100K. The County Accessor said,
you must follow the Trust, and 50/50. So increase in property tax.

Also, in wife's case, we used Lawyer and CPA, so everything pretty factual.

4. Back to my case. To avoid prop 13, tax increase. I heard this might work.
Again, key is to avoid a "PURCHASE/SALE". This TRIGGERS PROP 13.

A. I'm not sure if this has to be done, prior to demise of owner. Or can be done after.

B. You take out a "loan", mortgage on the house. Put the loan $ in a savings account.

C. Now the net value of the house is much lower.

D. Now when you divide up the assets of the estate. You keep the house and the other siblings get the "cash".

E. Because NO purchase/sell of the house occurred. Prop 13 not affected.
YOU KEEP original property tax.

F. A friend did this. So I know it works.

G. My problem is. To try and convince siblings, explain the process. Figure out "potential fair price of house", then take out loan, etc. Also, contact,
finance person familiar with this situation, and get everything in order prior to demise of parent. Similar to your concerns.

Good luck. Let me (us) know what happens.

Based on experience, other friends. Seems when it comes to estates,
and inheritances. Families go nuts/crazy. Seen to many split ups.

So sometimes, better to let it go, and keep families intact.

[pc95]

Well, as suspected, brother was agreeable, but not sister. My idea was met with trepidation. She did not want to give up "future financial security". Fair enough. Interestingly enough though, sister, now pregnant and in poor financial straights, with much younger fiancee finishing grad school, is requesting to move back in with aging parents for "a year or so". This on top of requesting to have parents remodel converted garage for living space. Not sure what will happen or if parents will agree or not - their decision. My original idea was separate from all this, but probably came into her reasoning of response. She 'enjoyed' her 20s - finishing school not until her early 30s - and entering the work-force only a few years ago. As a result she is in some debt, and it may be another 3-4 years until they've financially turned the corner. <sigh> Familiar sounding story, eh.....original idea is probably sunk. I wouldn't be surprised if my brother and I will be making some inheritance concessions to my sister to some extent.

[pb4uski]

So why would your aging parents spend good money to remodel the converted garage for her? Time to launch at her age. Moving in for "free rent" is bad enough, but spending money to remodel to accomodate her is outrageous.... perhaps if the place is less comfortable for her it will incentivize her to move out.... I hope your parents are wise enough to say no.

[Bamaman]

Anyway it goes, when children are inheriting homes, they need to immediately upon death of the last remaining parent get the house appraised. Then that's the "basis" for future tax purposes to those inheriting the house.

[pc95]

Quote:

Originally Posted by Bamaman Anyway it goes, when children are inheriting homes, they need to immediately upon death of the last remaining parent get the house appraised. Then that's the "basis" for future tax purposes to those inheriting the house.

The main point of the original idea was to avoid a new "basis"in California property inheritance. This can be done anyway in our case if siblings agree on sharing the house as is set in the trust, and no additional sale occurs. It only requires a new basis if a sibling wants to buy out the others post death. The more siblings, the easier it is just to sell the house. That probably wont happen anyway as all 3 of us still use the house in different fashions due to our circumstances.

In my case I looked at it as an interesting scenario to look into avoiding that 3-4x jump scenario in taxes - quite substantial - while equitably buying each out - this may have eliminated several inequitable outcomes in the future though it may not be possible without stepping on toes. I'm not dead-set on it so I don't care that much -- It might've been nice, but oh well.

[pc95]

Quote:

Originally Posted by pb4uski So why would your aging parents spend good money to remodel the converted garage for her? Time to launch at her age. Moving in for "free rent" is bad enough, but spending money to remodel to accomodate her is outrageous.... perhaps if the place is less comfortable for her it will incentivize her to move out.... I hope your parents are wise enough to say no.

My sister is pregnant 4 months and is paying inflated rent through the nose
in the same area with her fiancee who is still a grad student. There is a whole 'nother element I wont get into also. To shed light on the general dynamics and history financially: I still occasionally receive a medium to largish check in the mail or directly from parents explaining that they've given money to my sister, and want to be fair to my brother and I. This is how it has been for years. Each of us had a good sized college fund started in the 80s. My brother and I used ours for college; my sister partly did so and partly did not. By the time she got serious with college at 28 she had to take loans. I realize this is a silver-spoon scenario to start with for all of us. We should be so lucky to have college funds. My brother and I did not stray the straight and narrow, while sister dropped out of high school at 16 to 'rebel', 'adventure', or whatever. I've heard of stories of people getting serious and really doing well later, but my sister still has some distance to go; unfortunately its much self-inflicted, and my parents have born some of that impact even with the college fund. She's moved back before earlier and it wasn't ideal. Its hard to tell if they will allow this time - but maybe because of her pregnancy, they will accept the situation. It is a snow-ball affect or quagmire financially due in part to her fiancee being much younger and in grad school. One unfortunate observation or aspect I believe is my sister to be the most intelligent/book-smart out of the 3 of us. She has a high scholastic aptitude I immediately noticed a long time ago - her memory is certainly better than mine. She wasn't mature enough to engage her talent though earlier. So as usual we need to help her - and she is expecting support. Being family we need to support as you never know when the roles could be reversed or what may happen in the future. I know that is enabling at the moment, but I think once her fiancee finishes school and is working they will be ok.