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2 ways inheriting a house can turn into a tax nightmare

On Behalf of | Jun 20, 2022 | Estate Planning

Owning a house is part of the American dream. It is also a way to take a monthly recurring expense and turn it into personal worth. Rather than spending hundreds of dollars every month to pay rent, homeowners slowly accrue equity as they make payments toward their mortgage.

If you own your home, it may be the most valuable asset you have to pass on to your children or other loved ones when you die. While you may view the property as a blessing, it could actually cause tax issues for your beneficiaries. Recognizing those possible tax issues now can help you create a more effective plan that preserves as much value as possible and limits the stress the inheritance causes for your children.

When does inheriting a house cause tax issues?

When the property triggers estate taxes

Estate taxes can significantly reduce how much of your property passes to your beneficiaries when you die. The bigger and more valuable your house is, the more likely it is to be the asset that pushes your estate over the threshold for estate taxes. Your loved ones could lose as much as 40% of their inheritance to the federal government, even though California does not levy a state estate tax.

When heirs sell the home upon inheriting it

If your children already have homes, they live in another state or if they cannot maintain the property where you lived, they may decide to sell the home instead of moving into it themselves. If that happens, they may trigger capital gains taxes that could be worth as much as a third of the money acquired from the sale of the property, depending on circumstances.

The only way to protect your loved ones from taxes after your death is to plan for those tax responsibilities now. You can go over your property to figure out if you are likely to have enough to be subject to estate taxes and plan accordingly.

You can also talk to your children about what they would likely do with the property after your death. Their decision could influence your plans. Moving the property into a trust or adding someone to the deed now could be a way for you to minimize those tax losses.

Carefully planning your estate will help ensure that what you leave for your loved ones is a blessing, not a burden.