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We live in California & want to buy my mom's house but keep our tax exposure (cap gains & prop tax) low. How can we do this?

Concord, CA |

I want to buy my mom's house and want to minimizing our tax exposure, specifically around:

1. Capital gains taxes on the sale and/or transfer of her primary residence before she dies
2. Proposition 13, and maintaining low property taxes

What are our options to lower short and long term tax exposure for me and my mother?

Update: It looks like prop 13 won't be an issue and we'll be able to maintain the low assessed value. Regarding cap gains, some very important info I just received: Mom & Dad purchased house in 1970 for around $40k Dad died in 2006 and I believe the house got a full step-up in basis to $750k (at least that's what the form 706 stated) Current value of the house is around $650k (below step-up basis) Based on this info, wouldn't she be able to sell me the house and she'd incur no cap gain tax? This seems too straight forward, so I wonder what other bits we might be missing?

Attorney Answers 5

Posted

Your biggest tax saving option is to purchase the home AFTER your mother passes away. By doing that, the home will receive a step-up in the basis to the value of the home at the time of her passing.

You can attempt to maintain lower property taxes by placing the property into a revocable living trust - which allows you to avoid probate and will still keep the step-up in-tact. This will also possibly postpone the state's periodic assessment, and allow a lower property tax for a longer period. However, there is no guarantee - as the state/city can assess at any time.

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Posted

If you want to have the lowest capital gains tax when you sell it, then you want her to die owning it and inherit it. If you want to have the lowest property tax base, then it does not matter whether you buy it from her or inherit it from her.

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Asker

Posted

Bruce, thanks so much for your excellent comments. The house receive a step-up in basis when my dad died in 2006 for an amount that is now greater than the house value. Does this mean that any sale by my mother would result in no capital gains taxes?

Posted

Don't purchase the house now. Instead have prepare a trust a leave the house to you. You will take subject to any mortgages or liens, but you will get a step up in basis and there will be no Capital gain tax that she will have to pay.
Remember that if she has lived in the house more than two years, she gets an exemption of $250000 in the capital gain tax. So if the price she sells it at, minus any improvements, minus her basis is less than $250,000, then she pays NO capital gain taxes.

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Posted

The property tax question is easy in California. There is a parent-child exclusion from reassessment so it does not matter how or when you transfer the property. Just fill out the form for the local tax assessor and there will not be a reassessment. Remember though, it does not apply to siblings or other family members. Sometimes parents leave property to their three kids, but three adult kids do not want to own together, so two of the kids are bought out by the one that keeps the property. Now we have a problem because assume the parents have a 10,000 property tax base with a $120 annual tax. This is going to be reassessed when the two siblings get bough out. The tax assessor will happily assess 2/3 of the property at current market value. So if the property is worth $300,000 today then 2/3 = $200,000 + 1/3 of 10,000 for a grand total of $203,333 and the annual tax goes to about $2,400.

Capital gains are different. The other answers are correct. If you purchase the property while they are alive your parents have to pay capital gains taxes. If the transfer happens after they have passed away then there will probably not be cap gains if the estate sells it right after they pass away. Maybe you can rent the property from them and they can put it in a trust. You should really contact an attorney about this.

This does not create an attorney client relationship. If you have a legal question, contact an attorney directly to explain all ramifications of the facts associated with your case.

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James P. Frederick

James P. Frederick

Posted

Very well stated!

Posted

You could also consdier a sale to a "defective" grantor trust, which may accomplish your goals. Call me for more details 866-988-3956

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