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Kyle E. Krull
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Kyle Krull’s Answers

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  • Tax implication for an heir.

    I own a portion of a vacation home in Missouri of which I am planning on leaving my portion of the property to my nephew (he lives in Iowa) in my will. What are the tax implications for my nephew at the time of my death. The approximate value of h...

    Kyle’s Answer

    Without knowing more, I would "give" your nephew the real estate interest while you are alive only if the property is expected to dramatically increase in value after you make the gift. In other words, if your nephew's current use and enjoyment of the interest during your lifetime is not the motivation of your contemplated gift, then this transfer only makes sense if you are concerned about the future value increase making your estate more susceptible to estate taxes at your death. [Note: Since such a lifetime transfer would exceed your $13,000 annual gift exclusion, a gift tax return would need to be filed.]

    Here's a major downside to a lifetime gift - your nephew receives your "carryover basis" in the real estate. As a result, if he eventually sells it, then he will pay "capital gains taxes" on any appreciation (i.e., increase in value) in the property during the time you owned it and he has owned it.

    On the other hand, if your nephew "inherits" the real estate at your death, then the real estate value will be included in your estate value for potential estate tax purposes. However, on the bright side, your nephew will inherit the real estate with its date of death (your death, that is) value as its new basis for capital gains purposes. This can eliminate significant (or all) capital gains tax liability. As opposed to a "carryover basis," this is known as a "stepped-up basis."

    For further information on "gifting," follow the link to my website and read the February 2012 archived issue of my monthly estate planning newsletter.

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