In a recent interview with Charles Scutt, a reporter for a nationally syndicated real estate column published weekly, Altman & Associates founder, Gary Altman, shared the following information on inheriting a real estate property:
- What are the different possible ways of inheriting a real estate property (i.e., surviving ownership, tenancy in common, etc.), and what’s important to understand about each of these possible ways?The most common ways of inheriting real estate are:
- Through a Will as a specific devise, (i.e., I give my house to “A”
- Through a revocable living trust as a specific devise (i.e., Upon the Grantor’s death, my house shall be distributed to “A”) and
- As joint tenants with rights of survivorship (i.e. “A” and “B”, as joint tenants with rights of survivorship)
- What should you expect regarding inheritance tax? At what rate will you be taxed? (Please provide a few hypothetical scenarios.) There are two types of taxes at death: Inheritance taxes and Estate taxes.Inheritance tax is imposed on the transfer of assets, including real estate, at death. The rate is dependent on the relationship between the decedent and the inheritor. Estate taxes are imposed on the value of property at death. The Federal government has an estate tax for estates in excess of 2 million dollars. Some states have an estate tax, some states have an inheritance tax, and some states, like Maryland, have both.
Moreover, who pays the tax may be dependent on what someone’s Will says. For example, a Will can devise house to “A”, residuary of estate to “B”, and require that “B” pay all estate and inheritance taxes. While this may not seem fair, it can be the result if someone is not careful.
If someone had a 3 million dollar estate, the federal estate tax is $450,000. If the tax was shared proportionately, then if real estate going to “A” was worth 1 million, the federal estate tax would be 150k.
In Maryland, inheritance tax is paid of property is going to distance relatives or friends. So if “A” was a cousin or a friend, the inheritance tax rate is 10%, so the inheritance tax would be $100,000. Now, the inheritance tax reduces the estate subject to estate taxes, so the Federal tax could be different.
If the only asset was real estate, and it was worth 10 million, the federal estate tax would be 3.6 million.
- Are there any tips for helping to avoid paying large taxes on the inheritance? Planning has to be done prior to death. The owner of the property can give gifts prior to death, or can form a family limited partnerships, or can created a variety of complex trusts, such as grantor retained annuity trusts, qualified personal residence trusts and charitable remainder trusts to minimize large estate or inheritance taxes. While tool or technique should be used is highly dependent on the type of real estate, the other assets, the ages and health of the individuals, and other factors.
- What is involved if you decide to sell the inherited real estate property? How much will you have to pay in capital gains tax, etc.? Upon inheriting real estate property, you pay capital gains tax on the difference between what you net from the sale and your basis (purchase price plus improvements minus depreciation). Currently the federal capital gains tax is 15%. If it is a personal residence, and you meet the rules, you can exempt the first 250k from capital gains tax, if single, 500k if married.
- What are some important considerations for people to think about before, during or after the inheritance of a property? The most significant consideration is deciding what your own financial goals are. Once these are determined, then you need to determine if the property is part of your overall plan. If it is not, then it should be sold, if it is, then maybe it should be retained.
- What typically happens when a spouse inherits a real estate property? When a spouse inherits real estate, they can get a new basis and pay no estate tax, so, in most cases, they should probably keep it.How about when an adult child or an adult relative inherits a real estate property? What are the tax ramifications for each scenario?
It is easier to sell after death because you get a new basis, value on the date of death, and therefore less capital gains tax. However, some end up having to sell to pay estate taxes. If it is one parcel of land, worth 10 million dollars, and there are no other assets, then must sell the land to get the cash to pay the 3.6 million Federal estate, due within 9 months of death.