Should You Sell, Gift, or Keep Your Home Until Death? A Guide to Making the Right Decision
If you’re a homeowner in California, you’ve likely wondered about the best way to pass your property to your loved ones. Should you sell it during your lifetime, gift it now, or hold onto it until death? Each option has tax and financial implications that could impact both you and your heirs. Here’s what you need to know.
The Step-Up in Basis: A Key Advantage of Keeping Property Until Death
In California, when the owner of a property passes away, the property generally receives a “step-up” in basis. This means the property’s tax basis is adjusted to its fair market value at the time of the owner’s death.
This adjustment significantly reduces—or even eliminates—the capital gains tax liability for heirs when they sell the property. For example:
- Imagine you purchased a home for $100,000 decades ago, and it’s now worth $1 million.
- If you sell it during your lifetime, you could owe taxes on the $900,000 profit (minus certain exclusions).
- If your heirs inherit the property after your death, the new tax basis becomes $1 million. If they sell it for $1.1 million, they only owe taxes on the $100,000 gain.
The step-up in basis can translate into massive tax savings for your loved ones.
Option 1: Selling During Your Lifetime
Selling your home while you’re alive allows you to access the equity and use the funds for retirement, other investments, or immediate financial needs. However, this option comes with potential tax consequences:
- Capital Gains Tax: You may owe taxes on the difference between the original purchase price (your basis) and the selling price, minus exclusions (up to $250,000 for single taxpayers and $500,000 for married couples on a primary residence).
- No Step-Up for Heirs: Once sold, the property no longer qualifies for the step-up in basis at your death, meaning the potential tax benefits are lost.
Best for: Those who need immediate liquidity and are okay with potential tax liabilities.
Option 2: Gifting Your Home Now
Gifting your home during your lifetime might seem like a good way to pass on property to your heirs early. However, it has important tax implications:
- Carryover Basis: When you gift property, your heirs inherit your original tax basis, not the current market value. This means if they sell the property later, they could face significant capital gains taxes.
- Gift Tax Considerations: Gifting your home may be subject to federal gift tax rules, though the lifetime gift and estate tax exemption often prevents immediate tax consequences for most families.
Best for: Those who want to transfer ownership immediately and aren’t concerned about tax liabilities for the recipient.
Option 3: Keeping the Home Until Death
Holding onto your home until your death allows your heirs to benefit from the step-up in basis. This approach minimizes the tax burden when the property is sold, often making it the most tax-efficient option.
- Step-Up in Basis: Your heirs receive the property at its fair market value, which can significantly reduce capital gains taxes when they sell.
- Control: You retain full ownership and control of the property during your lifetime.
Best for: Those who want to maximize tax savings for their heirs and retain control over their property.
Additional Considerations
- Community Property in California: Married couples in California benefit from a full step-up in basis for both halves of community property upon the death of one spouse. This provides additional tax advantages for surviving spouses.
- Primary Residence Exclusion: If you sell your primary residence, you may qualify for a significant capital gains exclusion. However, this benefit doesn’t apply to other properties like vacation homes or rentals.
- Estate Planning: Proper estate planning can help ensure that your home passes to your heirs in the most tax-efficient way possible. Options like trusts can provide additional protections and benefits.
What’s the Right Choice for You?
The decision to sell, gift, or keep your home depends on your personal financial situation, long-term goals, and family needs. Key factors to consider include:
- Do you need the funds now, or can you wait?
- Are you concerned about potential tax liabilities for your heirs?
- Do you want to maintain control of the property during your lifetime?
How Kaminski Law Group Can Help
At Kaminski Law Group, we specialize in helping families navigate complex decisions like these. Whether you’re considering selling your home, gifting it to your heirs, or holding onto it, we’ll work with you to create an estate plan tailored to your needs. Contact us today to explore your options and secure your family’s financial future.
