Your parents may need to pay capital gain tax. It won't hit inheritance cap.
Why not wait until one of them pass away? (may be harsh to hear but I have been thinking about how to do this when I or my LD die).
The following is from ChatGPT
To pass a house to your child without incurring capital gains tax, the process depends on how the property is held and transferred. Here’s the exact procedure:
1. Step-Up in Basis Upon Death
When one parent dies, the step-up in basis rule applies to the deceased's share of the home. This means that the tax basis of the inherited portion of the home will be adjusted to its fair market value (FMV) at the date of death. The specific step-up depends on how the house is owned:
- Community Property State (e.g., CA, TX, AZ, etc.) ( I looked it up. MA state is not community property state)
If the home is held as community property, the entire property gets a full step-up in basis, reducing capital gains if sold later. - Joint Tenancy or Tenancy by the Entirety (Non-Community Property States)
Only the deceased spouse’s half gets a step-up in basis.
2. Keeping the Home Until the Second Parent Passes
If the surviving parent stays in the home and it appreciates, only the deceased spouse’s portion benefits from the step-up. If the surviving parent later sells, capital gains tax applies only to their original portion.
However, if the home is passed to the child at the death of the second parent, the entire property receives a second step-up in basis, eliminating capital gains tax if the child sells the house immediately.
3. Best Transfer Methods to Avoid Capital Gains Tax
- Inheritance via a Will or Trust: The child inherits the house upon the death of the last parent and receives a full step-up in basis. If they sell immediately, there’s no capital gains tax.
- Revocable Living Trust: If the house is placed in a revocable trust, the child inherits it directly upon the second parent's passing with a step-up in basis.
- Life Estate with Retained Interest: The parents can create a life estate where they retain the right to live in the home. When the last parent passes, the child automatically owns the home, receiving a step-up in basis.
4. Avoiding Common Mistakes
- Don’t Gift the House Before Death: If you transfer the home while alive, your child receives it at your original cost basis, leading to capital gains tax when they sell it.
- Avoid Joint Ownership with Child: If you add your child to the deed, they don’t get a step-up in basis and may owe capital gains tax.
Bottom Line
The best way to avoid capital gains tax is for the child to inherit the house upon the death of the last parent through a will or trust, ensuring they receive a full step-up in basis.
Would you like details on estate tax implications or the best trust options for your situation?
