My father and I are purchasing a property together. Should he pass away, do I need to pay inheritance tax if he leaves his share to me, and if so, is it on only the equity value of the property or the full market value of the property? This is in the state of Pennsylvania. Thank you.
Hello ... a pleasure to meet you ...
Yes - you will. If it just the two of you as joint owners (whether that be Jointly with Rights of Survivorship or as Tenants in Common), and depending on how the Will is phrased (with respect to the tax clause), you will owe tax on 1/2 the Fair Market Value of the property on the date of his death. It is referred to as the Date of Death value.
Further, your "basis" in the property will be two-pronged. You share will be your "cost" basis and your father's half will have a "stepped-up" basis. Please keep accurate records, so - in the long run - when and if you dispose of the property - you will be able to correctly identify any tax ramification.
Good luck ...
Let me know if you need anything clarified.
John B. Whalen, Jr., J.D., LL.M. is an AV Peer Review Attorney and Counselor at Law, is listed in The Bar Register of Preeminent Lawyers, is Avvo Rated 10.0 Superb, is a recipient of the Legum Magister (LL.M.) Post-Doctorate Degree in Taxation (from the Villanova University School of Law), and is a recipient of the American Jurisprudence Award in Wills, Trusts, and Estates (from the Widener University School of Law).
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YOU do not. His estate will owe any federal or state inheritance taxes UNLESS you take your share before submitting proper tax returns and paying taxes out of the estate. However, the inheritance tax exemption (called the lifetime unified credit) is fairly high and most families fall below this limit. It will depend on his taxable estate wealth at the time he passes.
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You could take title as joint tenants with rights of survivorship so that when you father passes, you automatically become 100% owner of the property.
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Yes, PA Inheritance Tax will be due on the share which he owned that is passing to you. This is so, whether you purchase the property as joint tenants with right of survivorship (that is, each of you owns an undivided interest in the whole property, and when one of you passes away, the other automatically becomes the sole owner of the whole property) or tenants in common (each of you owns a fractional interest, the distribution of which will be governed by the Will when one of you passes away). The way it will be reported on the PA Inheritance Tax return will be different depending on the form of ownership, but the tax result will be the same. The fair market value of the property on the date of death will be the beginning point. Half of that will be reported as property that is being transferred at death. If the property is subject to a mortgage, the mortgage will be reported as a debt of the decedent, which is a deduction that will offset the value being reported, but the mortgage is only a deductible debt to the same extent as the decedent’s fractional interest in the property.
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