A Zillow update made waves this morning after it reported that former President Donald J. Trump had sold Mar-a-Lago for $422 million. At the time of this writing, Listed on the Zillow website The 5,061-square-foot home at 1100 South Ocean Boulevard in Palm Beach, Florida is shown to have sold on Friday, August 4, 2023. Previously he changed owners in 1995 for $12 million, according to the website.
It’s not clear if the move is legitimate or a hoax, but the latter is highly likely.Hours after the report, Eric Trump issued a statement “The Mar-a-Lago is not and will not be sold yet. This rumor is absurd.”
This type of property transfer is not usually in the news, nor do I usually cover it. But from a tax perspective, it’s the whispers about cost that are noteworthy. “Why didn’t he sell it for $1 if it ended up in family hands (as reportedly)?” people wondered.
The infamous one-dollar transfer of a parent’s home is one of those cases that often haunts tax and estate attorneys. While there may be valid tax planning reasons for making transfers below fair market value, there are just as many reasons not to make such transfers. Here are some important things to consider when transferring property to a family member.
foundation
Basis is, at its simplest, the cost you pay for an asset. Actual cost is sometimes called cost basis.
For real estate, the standard is the cost plus the capital improvement. Making capital improvements (major changes that add permanent value) to your home will increase its base amount. The result is sometimes called the adjusted baseline.
To calculate profit or loss for federal income tax purposes, take the asset’s disposal price (most likely the sale price) and subtract the adjusted basis. The difference is the realized profit or loss.
When a person dies, the foundation of the assets held at the time of death is “stepped up”. This means that the threshold is increased to the fair market value of the asset on the date of death. This usually happens in proportion to the percentage of ownership. For example, if the deceased owned her 50% of the property, her 50% would be worth more, but his remaining 50% would remain at their previous standards.
In contrast, gifted property has a “carry forward” standard. This means that the original base of the asset is passed from one owner to the next.
Now consider the infamous $1 transfer. You assume he bought the house for $200,000 and made no capital improvements. Let’s assume that the house is currently worth $500,000.
If you died today, your heirs would inherit the home with a base value of $500,000. This means that if you sell for $500,000, you will not receive a capital gain ($500,000 sale price minus $500,000 step-up base = $0).
If you gifted the property to your heirs while you were alive, they would inherit your underlying $200,000. If he then sells the house for $500,000, the house will have a capital gain ($500,000 sale price minus he’s $200,000 = $300,000 capital gain).
Note that new owners must meet the 2/5 rule to qualify for the capital gains exclusion. This means the home must have been owned for at least 24 months (2 years) in the last 5 years to that date. In her five years up to the date of sale (closing date), the taxpayer must have lived in the house as her primary residence for at least 24 months.
If you sell your home at fair market value, even if it is sold to your heirs, the new owner will have equal grounds for that sale price. In this case, even if the heir bought the house for $500,000 and later sold it for $500,000, he would not make a profit.
But on sale for $1? It is not a sale based on fair market value. It’s a gift. In most cases, this means carryover criteria apply, and then your heirs will miss the step-up criteria when you die. In this example, if the house was “sold” for $1 during his lifetime, even though the house was worth $500,000 when it was gifted, the new owner’s hand is based on his $200,000. basis).
Evasion of probate
So why send $1 (or anything less than fair market value) in the first place? Taxpayers often believe they are saving money by avoiding probate. Here’s why it doesn’t always make sense.
Probate is the formal process by which a court (or registry of wills) authorizes a person’s representative (usually called an executor) to perform the terms of a will. Over the years, probate has been portrayed as costly and complicated. Usually not. Probate is relatively cheap and easy in most states, like my home state of Pennsylvania. Probate fees for real estate holdings worth $500,000 are likely to be in the range of about $500, well below the capital gains tax imposed on selling a home below its fair market value.
And here’s the most important point, and what your TikTok reel doesn’t tell you, to avoid probate is to transfer all assets owned by the decedent to his name before his death. must be effectively transferred from This includes bank accounts, cars, business interests, etc. If your goal is to avoid probate, simply giving away your parent’s home for his $1 while alive usually won’t work. We still have a lot to do.
inheritance tax and inheritance tax
Another reason in favor of transferring $1 in lifetime is inheritance tax and inheritance tax avoidance. To be clear, effective planning can reduce your potential inheritance and inheritance tax burden.
In 2023, when wealth reaches $12.92 million ($25.84 million for married couples), federal inheritance tax will begin. Exceeding these amounts is subject to a federal inheritance tax rate depending on the excess amount, which he starts at 18% and goes up to 40%. Long-term capital gains rates can reach up to 20%, so transferring assets out of real estate during your lifetime can be tax-saving. However, most taxpayers are not subject to federal inheritance tax.
Even those of us who aren’t millionaires may have to pay state inheritance and inheritance taxes. According to the Tax FoundationAs of 2022, 12 states and the District of Columbia have state inheritance taxes, and 6 states have state inheritance taxes (Maryland has both). The existence of these taxes does not necessarily mean that unfair market transfers will result in lower taxes. For example, Pennsylvania has an inheritance tax of 4.5% on property passed on to children, which is lower than the average capital gains tax. rate.Other states may not apply the tax until certain criteria are met—Connecticut match the federal government Therefore, no inheritance tax is paid unless the decedent has a taxable estate in excess of $12.92 million.
Also, in some cases, if you make a gift within a certain period of time before your death, that gift may pass back into your estate and be subject to taxation (this is also true for federal purposes).
gift tax
As noted above, the transfer of property below fair market value is a gift for federal purposes. For most taxpayers, these transfers are usually irrelevant. This is because even so-called taxable gifts are usually not immediately subject to federal gift tax. They are chipping away at the federal inheritance tax exemption. And remember, you’ll need a hefty tip to get there, as federal inheritance tax doesn’t apply until your wealth reaches $12.92 million ($25.84 million for a married couple).
However, some taxpayers are subject to the gift tax when they transfer millions of dollars in real estate for less than fair market value, or when they transfer small amounts as part of a series of other gifts. There is a possibility. Transfers below fair market value should be considered in conjunction with long-term tax planning.
Tax relief and other considerations
Most taxpayers are not subject to federal inheritance or gift taxes, but are subject to property taxes. This is another area where a $1 property transfer can have unintended tax implications. For example, while some states and townships offer property tax freezes and rebates for seniors who own homes, the transfer of real estate (even for a $1 sale) is almost always taxable, even if Older people will be excluded from these vacations even if they continue to live in the house. .
As is often the case, another problem can arise if the previous owner chooses to remain in the home after the move. For example, the seller (usually a mother or father) who continues to live in the house may have to pay rent to the new owner, even if it is their child. Failure to do so could result in the new owner giving a gift of 100,000 yen each month. Fair market value of rent. Failure to do so may complicate other benefits for seniors beyond tax implications.
There may also be problems related to repaying or securing mortgages on real estate. Finance companies are not always happy with the transfer of below fair market value. Also, removing assets from a mother’s or father’s portfolio without due consideration could jeopardize their ability to obtain credit in an emergency.
ask for help
There are valid reasons for homeowners to want to transfer their property to related parties at fair market value or below fair market value. But don’t rush into a deal without understanding the big picture. Before signing the dotted line, it’s best to consult a tax professional to discuss the pros and cons.
