How to avoid inheritance taxes on home?
Dear Dr. Don,
-- Peg Pecuniary
I'm sorry for your loss. The fact that you lived in the house all your life doesn't automatically make it yours when your mother passed. Typically your mother's estate would be responsible for paying any estate taxes, but I'll trust that you know what you paid in taxes when you inherited the house.
If you sell your house to your nephew below its fair market value or change the deed to reflect co-ownership, you will have given him a gift. You'll be responsible for any gift taxes. That gift tax exposure can be managed using the federal lifetime gift tax exemptions.
The best action to take depends on your goals. Are you looking to live in the house until you die? Do you want to minimize the gift or estate taxes you pay or the taxes your nephew pays when he
sells the home? It's likely the best approach for both you and your nephew is to have your nephew inherit the home when you die.
I'd suggest working with an attorney who specializes in estate planning. There's a lot of uncertainty over how estate and gift taxation may change for 2013. Current law is scheduled to sunset Dec. 31, 2012. If the government doesn't take action, then estate and gift tax exemptions go back to the 2001 limits. The attorney can consider your goals and work to find the estate planning solution that best meets those goals.
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