Q: “Hi Robert. My parents would like to transfer ownership of their home to either me or one of my siblings. They’ve asked me to look into this. I’m not sure where to start. The home has been paid in full. Can you point me in the right direction?”
- Ricardo, San Jose, CA.
A: Sounds like a wonderful gift! Ricardo, transferring ownership of your parents’ home to adult children is a relatively simple process that requires documents from a title company.
The transfer may also require you or you parents to pay property transfer taxes, depending on the city or county.
Tax consequences of a transfer are a primary consideration.
For example, if your parents bought the home for $100,000 and then remodeled and upgraded the property at another cost of $50,000, the “cost basis” would be $150,000.
Let’s say that the property transferred to you is worth $300,000. Later, you sell the home for $300,000. You could be taxed on the difference between your cost basis and the sales price – $150,000. At a capital gains rate of 15 percent, you could be looking at a $22,500 tax bill.
However, if you were to inherit the property at your parent’s passing, then the current value of the home would be based on a “stepped-up basis” of the property. Under that scenario, if you sold the home for its inherited value, you would not have to pay any capital gains taxes.
In another approach, if you moved into the home now or when you inherit the home, if you live in the property for at least two out of five years before you sell, you would avoid the capital gains tax.
If you are married and you and your wife lived in the home and filed a joint tax return, you would have a $500,000 capital gains tax exemption. There’s a $250,000 exemption for individuals or couples filing separately – per qualifying individual.
The transfer itself is a relatively simple process, but only after you’ve ironed out the details with certified public accountant or real estate attorney and the title company to determine how you want to accept transfer the property.
An accountant can examine financial and tax issues, an attorney considers legal matters and the title company will handle title insurance and determine if there are any liens or other claims against the property.
Even if the home’s mortgage is paid off, the title could have encumbrances filed against it.
One good hour of solid advice will be better that tens of thousands of dollars that you could end up owing to the IRS if you make the wrong move.