“We have a situation where both of my in-laws passed away in the last several years. My wife was the daughter and she and her brother are the executors to the last of my in-laws to pass away.”
An estate includes a small house appraised at $220,000, which the estate owns, and the family is trying to determine the best way to transfer the home to a 30-year-old adult son. The article, “Parents seek best option to sell inherited estate to adult son” from msn.com, offers a few different options.
One option is to have the son purchase the home from the estate directly. Another is having the parents buy the house and rent it to him, with the end goal of the son buying the home when he is in a better financial position to purchase the house.
The home is currently in a trust, which was done to make it easier for the parents or any other heirs to sell or transfer ownership of the home.
The property can remain in the trust, but the estate or the in-laws do not own it. Instead, it is owned by the beneficiaries of the trust.
The date the surviving in-law spouse died matters. Let’s say the mother-in-law was the last to die, and she died in 2022. If the property was worth $100,000 at the time of her death and its value is now $220,000, the sale to the son would trigger a tax on the $120,000 profit.
Ordinarily, suppose the property is sold within a year of the death of the property owner. In that case, the value of the property at the time of death is assumed to be identical to the amount of the sale, and there are no federal taxes to pay on the sale, as there is no profit.
What about having the son buy the property? If he can qualify for a mortgage and buy the home for the appraised amount of $220,000, the trust will likely be able to avoid any taxes. This is especially true if the date of the mother-in-law’s death was within the last year or if there is documentation showing the home had a $220,000 value at the time of her death.
What if the son can’t qualify for a mortgage, and the parents decide to rent the property to him? The property would become an investment. The wife and brother will enjoy the tax benefits of depreciation, be able to deduct real estate taxes, deduct other expenses and take the rent as income. If and when the son does buy the home, the wife and her brother will have to pay taxes on the profit from the sale of the home—assuming the house continues to appreciate in value—and will have to repay the depreciation benefit received when they owned the home as an investment property.
One thing to be explored is whether the parents or the deceased in-laws have any income or estate tax issues. Under current federal estate tax laws, as long as the estate is below the $12,900,000 exemption, there would be no federal estate taxes to pay. But some states have a state estate tax or other fees on assets left in an estate. An experienced estate planning attorney will be able to help with this.
Regardless of how the parents decide to manage this transaction, having an experienced attorney to draft the legal paperwork will be important. Everything must be carefully documented so all beneficiaries can be confident that the property transfer was done correctly.
Reference: msn.com (Aug. 10, 2023) “Parents seek best option to sell inherited estate to adult son”