Smarter to sell million dollar home now or leave it to kids?

[2HOTinPHX]

Some of you may have followed my post on my siblings and I inheriting house from parents over the past year or so. Our parents were fortunate to have some great neighbors/friends who were also original owners. They/we shared many good times with them all. Unfortunately since our parents passing in 2019/20 we have lost all but one of the original neighbors on the street. This neighbor is very active for their age and very sharp. Unfortunately their spouse passed about 6 months ago. They have expressed some feelings of loneliness with spouse and the neighborhood friends all gone. She does have some outside the home activities. Her children are visiting regularly but they all live out of town theses days. Some of the children have offered to have parent come live with them. I am not sure what might happen as this is second hand news coming from my sibling who is still in contact with one of the siblings.

A question has come up that perhaps some here could provide feedback on. So assuming this persons house is worth 1,000,000 or so being in the very hot Bay Area market. From what I have heard the neighbor would like to leave the house to the children to inherit and avoid paying taxes that she would most likely have to pay if she sold it now. Assuming it is paid off and she does not need the money to live on is this the best strategy?
What if this real estate bubble burst? How fast and far could it go? Could a drop in real estate values offset any tax savings if not selling now?
Keep it and rent it out perhaps?
If she sold the house and had the money in the bank any issues with this other that low interest rate.
Money in house protected from Medicare/medicaid?
Thoughts? Ideas?

 

[RetireeRobert]

Your crystal ball is as good as ours as to the future, whether RE "bubble" will burst, how long will that neighbor lady live, etc.

"Smarter" for her all depends on what her preferences are. You say you heard "she would like to leave house to children". From that snippet, I would read into it that her preference is to continue living there, then let her kids "inherit" the house. That would be smart from a tax standpoint as kids would get a step up in basis that way. So, in that case her preference (to continue living in house ) and "smart" from a tax standpoint coincide.

 

[2HOTinPHX]

Your crystal ball is as good as ours as to the future, whether RE "bubble" will burst, how long will that neighbor lady live, etc.

"Smarter" for her all depends on what her preferences are. You say you heard "she would like to leave house to children". From that snippet, I would read into it that her preference is to continue living there, then let her kids "inherit" the house. That would be smart from a tax standpoint as kids would get a step up in basis that way. So, in that case her preference (to continue living in house ) and "smart" from a tax standpoint coincide.

Thanks for the feed back....I think her preference "might" be to relocate to be near or with one of the kids. So she might look at renting out or selling.

 

[Sunset]

Money in the house is not protected from medicaid, nor would it be if she sold it.
Unless she sells the house and gives the money to the kids and lives over 5 more years. So not very viable as risky to her.

Renting it out would work but does she really want the hassle.

 

[2HOTinPHX]

interesting item on selling:
Widowed taxpayers. If you are a widowed taxpayer
who doesn't meet the 2-year ownership and residence requirements on your own, consider the following rule. If you
haven’t remarried at the time of the sale, then you may include any time when your late spouse owned and lived in
the home, even if without you, to meet the ownership and
residence requirements.
Also, you may be able to increase your exclusion
amount from $250,000 to $500,000. You may take the

1. You sell your home within 2 years of the death of your
spouse;
2. You haven’t remarried at the time of the sale;
3. Neither you nor your late spouse took the exclusion
on another home sold less than 2 years before the
date of the current home sale; and
4. You meet the 2-year ownership and residence requirements (including your late spouse's times of
ownership and residence if need be).

 

[skyking1]

That 2 year rule is her out. She has to have some money in the original purchase, plus any receipts she has. The taxable amount may not be so bad.

 

[2HOTinPHX]

Your crystal ball is as good as ours as to the future, whether RE "bubble" will burst, how long will that neighbor lady live, etc.

Very true..maybe I will ask my magic 8 ball...found this interesting read on Bay Area housing market cycles..nice chart on there.

https://www.bayareamarketreports.com/trend/3-recessions-2-bubbles-and-a-baby
From the article:
Going back thousands or even tens of thousands of years, human beings have tried to predict the future, and whether using priests, oracles, astrologers, pundits, economists, analysts or "experts" of every stripe - and currently having their "authoritative" forecasts headlined every day in the media - we show no aptitude as a species for having the ability to do so with any accuracy. We can't even remember the mistakes of the recent past - which is one reason why we don't seem to be able to escape cycles - much less foretell what's going to happen tomorrow.

 

[TrvlBug]

Her husband passed 6 mos. ago which means she has a stepped up basis as of that date. IIRC, she gets stepped up basis for both sides, but house has to be titled a certain way. I'm remembering from 25 years ago when my DM passed. Parents house was title the usual joint so only one side got the step up, but we could have gone to court and had it retitled retroactively if we needed. DF sold house and just squeaked by avoiding all taxes.

Edited to add: lots has changed with the recently enacted changes to Prop 13. They might want to consult with an attorney in that area of expertise.