House inheriting

[Badger]

My wife's 2 grown children will eventually be inheriting everything including our house. The daughter has expressed an interest in living in it and would buy out the son's half. If I understand correctly cash will be inherited at 100% and stocks will be 100% at the basis when we die. But what about the house? It has increased in value by a little more than 20X since we bought it 40 years ago. Would they be taxed on anything for the house or would they have to get it appraised for a new basis before they sell? How can they inherit the house without having to pay taxes.
I would guess if she was to keep the house then the property taxes would increase because of a new owner. That would probably be 5-6X what we presently pay so she may want to rethink owning it.

 

[NgineER]

My understanding is that the basis resets when inherited. Get it appraised at that time to set the value for her to buy her brother out.
As far as property taxes, I think that is dependent on where the property is located.

 

[TickTock]

OP,

Also make sure you don't put DS and DD on the title before you pass on, as that negates the step-up basis.

 

[38Chevy454]

House gets stepped up value when you die. Good idea getting an appraisal to show value at time of death. Property tax depends on your locality rules, it may be close to the value you pay and so no big increase when you die. Or could be artificially low and get a big increase for daughter.

 

[HarveyS]

It sounds like it is enough $$ to hire an estate attorney and/or a tax professional to make sure you get this right for the state you live in.

 

[Aerides]

Be 100% sure that the other sibling doesn't have any sights on the house themselves, and that splitting it will be easy and friendly for both of them when the time comes. They get along great and talk often? Wonderful. Anything less....careful.

Or just bequeath it to her only in your will, and balance out the other kid with other stuff. Make it as simple as possible to avoid any grudges or issues after you're gone. You want their taxes to be minimal and simple, sure, but make sure their relationship isn't complicated by this either.

 

[Dtail]

IIRC, you live in the Panama city area in Florida. I assume you have been receiving the homestead exemption for your property taxes, which limits the increases over the years.
Thus you logically are probably paying taxes nowhere near the current appraised value of your house, so the step up basis would work, but there could be a very large increase in property taxes.

 

[Badger]

Thank you all for your suggestions and comments. If the basis resets then this will be easy for them to get an appraisal and start out at that value. Putting both of them on the title was one of our thoughts but that doesn't sound like such a good idea anymore. But we do have an attorney that wrote our trust, wills, etc. so I will be talking with her when I update everything. I am pretty sure this won't be an issue between the two of them but we will be discussing it with them. Leaving it to the daughter and balancing it out with the son getting additional cash equal to half the house may be the way to go. Yes, Dtail our taxes are low because of homestead exemption and they have been grandfathered in to not increase by more than 3%/yr. but I can't imagine the state willing to give up higher property taxes when the house changes hands.

 

[Markola]

If her ability to pay property tax is a worry, well, that’s just the beginning of costs of homeownership, of course.

I’m jaded and am not sure that bequeathing a house to a child is doing them a favor. Three of the 4 houses adjacent to ours were inherited from parents. Only one of the owners seems to have the income to maintain the property, which probably damages our collective property values. YMMV.

 

[Mr. Tightwad]

Gone up in value 20X in 40 years?

I have one up 6X in 27 years and another up 7x in 29 years.

 

[Badger]

Gone up in value 20X in 40 years?

I have one up 6X in 27 years and another up 7x in 29 years.

Not a typo. It is actually much more than that. It was in bad shape and nobody wanted it. There is a lot of sweat equity in it but it is really the land and location that has made it desirable.

 

[Badger]

If her ability to pay property tax is a worry, well, that’s just the beginning of costs of homeownership, of course.

I’m jaded and am not sure that bequeathing a house to a child is doing them a favor. Three of the 4 houses adjacent to ours were inherited from parents. Only one of the owners seems to have the income to maintain the property, which probably damages our collective property values. YMMV.

With the rest of the inheritance she won't have any trouble. She is not a young child but has children of her own and is now a grandmother. She and her husband are doing well and getting ready to retire soon. My biggest concern is getting the trust set up to make annual distributions to both daughter and son instead of a lump sum.

 

[OldShooter]

With the rest of the inheritance she won't have any trouble. She is not a young child but has children of her own and is now a grandmother. She and her husband are doing well and getting ready to retire soon. My biggest concern is getting the trust set up to make annual distributions to both daughter and son instead of a lump sum.

Be sure to get some help with this. Periodic payments sounds nice and easy but what if the beneficiary develops a medical condition that requires expensive care? You want the trustee to be able to accelerate payments to support this. Lots of other "what-ifs" too like the death of a beneficiary. The attorneys know how to handle stuff like this.

 

[Badger]

Be sure to get some help with this. Periodic payments sounds nice and easy but what if the beneficiary develops a medical condition that requires expensive care? You want the trustee to be able to accelerate payments to support this. Lots of other "what-ifs" too like the death of a beneficiary. The attorneys know how to handle stuff like this.

Good point and one I didn't think of. A suggestion like this and the others are some of the many reasons that this forum is so important.

 

[Mike999]

I’d suggest talking to your attorney about having the house titled TOD, transfer on death. As I understand it, that could cleanly transfer to your daughter and preserve the step up value at the time of death/transfer. I would also think about making your son sole beneficiary on some other like valued investment account in with consideration for the tax liability for that account, like a traditional IRA would come with a tax liability, a Roth IRA would not.

 

[rayvt]

With the rest of the inheritance she won't have any trouble. She is not a young child but has children of her own and is now a grandmother. She and her husband are doing well and getting ready to retire soon. My biggest concern is getting the trust set up to make annual distributions to both daughter and son instead of a lump sum.

Why? Don't try to control them from beyond the grave.

 

[isisdave]

Thank you all for your suggestions and comments. If the basis resets then this will be easy for them to get an appraisal and start out at that value. Putting both of them on the title was one of our thoughts but that doesn't sound like such a good idea anymore. But we do have an attorney that wrote our trust, wills, etc. so I will be talking with her when I update everything. I am pretty sure this won't be an issue between the two of them but we will be discussing it with them. Leaving it to the daughter and balancing it out with the son getting additional cash equal to half the house may be the way to go. Yes, Dtail our taxes are low because of homestead exemption and they have been grandfathered in to not increase by more than 3%/yr. but I can't imagine the state willing to give up higher property taxes when the house changes hands.

The problem here is what if daughter changes her mind about wanting it, or living in it, before, err, you know. What if they decide to rent it out for a year or three before selling it due to current circumstances?

 

[pb4uski]

Florida allows enhanced life estate deeds. DW and I had an enhanced life estate deed on our Florida condo, with our two kids named as remainderman. It is like beneficiaries on financial accounts.

As long as one or the other of us were living, we could live in it, rent it and keep the rent, sell it and keep the sales proceeds, etc... all the rights of ownership. Once the second of us dies, the kids own it automatically. No need to go through probate. And stepped up basis.

So if you used that when the second dies the kids will own it jointly, can get an appraisal done which they need to establish the stepped up basis anyway, and then negotiate a buyout.