Don’t Sell Your Home Before You Die!

As parents get older, the question of what to do with the family home can become front and center. Should mom and dad sell it and live off the sales proceeds? Should they move out and rent the property out? What should they do when a spouse dies? As the saying unfortunately goes, "Nothing is certain except death and taxes," both of which come into play here. While everyone's situation will be different, below we’ll discuss why it may be in everyone's best interest for mom and dad to keep the family home rather than sell it.

Owning a home comes with a lot of perks and is a great way to build generational wealth by passing that home on to your children. However, we also always need to consider tax implications in order to maximize how much of that wealth can be kept within in the family. Keep in mind, everything below applies to all homeowners, not just the super-rich.

Capital Gains Taxes

Capital gains taxes are taxes levied on the gain in value when we convert assets from one form to another - typically by selling them such as when you sell your house. If you sell the property for more than you purchased it for, you have gained, and the government wants to tax that gain - the difference between what you paid for the asset and what you sold it for. However, our tax code allows for us to minimize that tax so long as the property is inherited from the owner at their death.

Typically, if mom and dad were to purchase a house for $100,000 and then sold it 30 years later for $400,000, they would need to pay taxes on that gain of $300,000. However, if mom and dad's son were to inherit that property from mom and dad, then the son could sell the property and potentially pay $0 in capital gains. This is a result of the son receiving a step-up in basis to the fair market value on the property as of mom and dad's date of death (whoever died last). Thus, even though mom and dad bought the property for $100,000, if the property is valued at $400,000 at their passing and the son sells it for that much, the son has not realized a gain, as far as the tax code is concerned, and therefore pays no capital gains taxes. Going further, if he were to sell it for $450,000, then the son would only pay taxes on the $50,000 gain from date of death to date of sale. I hope you can see how a process like this can really build generational wealth.

Death of a Spouse

Your next question likely is, "What if a spouse dies and the survivor needs to sell the property? Does the spouse receive the same gain?" And that answer is, partially. Let's say husband dies first, but both he and his wife were on title as joint tenants with a right of survivorship meaning the property goes to wife automatically. Since wife is on title, her 1/2 interest does not step-up meaning her cost basis would still be that $100,000 they paid initially. However, the husband's 1/2 interest does step up to the fair market value as of his date of death. This means that if wife were to sell the property shortly thereafter, she would still qualify for that step-up in basis on the husband's half, significantly reducing her tax burden even though it wouldn't be as high as her son's savings would be if mom were to keep the property for the rest of her life.

Tax Advantage to Holding

As you can see, it is more tax advantageous for the heirs if mom and dad were to keep the family home in their names and for their children to inherit the property rather than parents selling it during their lifetimes and paying the full or a partially reduced capital gains tax rate. Add to this, the final generational wealth saver is for mom and dad to put their house in a trust so the children can save on the massive cost of going to probate court to inherit the property. Watch our video or read our post on the cost of probate for more details, it often shocks people when we lay the numbers out for them.

Finally, all this is not to say there aren't other tax advantages to consider before selling or keeping your home. For example, California allows for a credit of $250,000 for individuals or $500,000 for married couples on capital gains before having to pay taxes if they sell their property, so long as some other requirements are met. However, we'll talk about that in more detail in another post.

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