Hardly a week goes by without someone contacting our office to discuss an intra-family transfer of real estate. Usually, a person calls and tells us what they have in mind, and if they have not already acted by themselves without our advice, we are able to keep them from making costly mistakes. In other instances, however, we are not consulted in advance, and we have the unfortunate job of telling a client how they have created a tax liability or other problem, simply because they did not seek our assistance initially.
Whether it is based upon erroneous advice from the internet or a suggestion from a friend or other family member, it is too frequently an occurrence that many elderly persons take action by themselves to deed property to children, with the idea that they need to avoid probate. Unfortunately, when these transfers are made without obtaining prior legal advice, they cause a myriad of problems ranging from unpaid gift taxes, loss of homestead exemption, increases in property taxes, loss of eligibility for Medicaid assistance, and/or increased exposure for capital gains taxes when the property is ultimately sold by the children.
Here’s one example. Mom owns her homestead free and clear and paid $30,000 for the property in 1975. The current fair market value of the property is $300,000. Based upon a desire to “avoid probate”, Mom signs a deed to convey the property to her children before she dies. Mom has passed along her $30,000.00 tax basis to the children. When the children sell the property (assume a $300,000 sales price), they will have to pay capital gains tax on the $270,000 gain (e.g. $54,000 in tax based on a 20% capital gains rate).
If instead, Mom had retained title to the property until her death, the children would receive a step-up in basis to the fair market value at the date of death ($300,000) in this example, and would pay zero in capital gains tax upon the sale of the property—and avoid a $54,000 mistake. (There are ways to accomplish this result and avoid probate, too, by the way.)
There are many other reasons why Mom should get good advice from an attorney before making a transfer like this. Please call us for a consultation before you act, so that we can help your family avoid these kinds of costly mistakes.