The Elrod Firm

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How Should I Deed My House To My Children?

Justin, I’m thinking of deeding my home to my children to avoid inheritance taxes.  Do you have any recommendations on how I should handle this?  – Douglas

Douglas, Thanks for writing.  The short answer is that you probably should not be concerned about the inheritance tax, and you probably shouldn’t deed your house to your children.  For the vast majority of families in Arkansas, the inheritance tax is not an issue because it only impacts estates exceeding $5.5 million.  This means you can leave an inheritance to your children of anything up to $5.5 million before paying a penny in inheritance taxes.

If taxes are your main concern right now, the tax you should be most worried about when it comes to transferring your home to your children is the capital gains tax.  If you deed your home to your children during your lifetime, they will receive the property with your tax basis, which was set when you purchased the property years ago.  If that basis was lower than the value of the property when your children eventually sell it, whether they sell it while you’re living or after your death, they could have a major capital gains tax issue on their hands.

If they inherit your house at your death instead of receiving it from you during your lifetime, they will receive a step-up in tax basis, determined as of the date of your death.  In most cases, this will drastically reduce or even eliminate capital gains taxes when the property is eventually sold.  Instead of deeding your house to your children, I recommend you look into estate planning options designed to pass your home to your children at your death without the cost and trouble of probate court.

Are you in a similar situation?

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