Don't Transfer the Home! (Part Four)
Don't Transfer the Home! (Part Four)
December 6, 2009
This is the last of a four-part blog exploring the risks and consequences of transferring an elder adult's home prematurely.
Again, for purposes of illustration in this last segment, assume the following background facts:
- That the elder adult is my father, who purchased his home in Walnut Creek for only $16,000.
- That my father's home is now worth $816,000 (i.e. it has appreciated $800,000).
- That my father and I "panicked" in light of his first minor stroke or fall... and he transferred ownership of his home to me.
The Fourth Reason Not to Transfer the Home - Avoiding Capital Gains Taxes at My Father's Death.
Assume my father transferred the home to me, and he later passes away. If I decide to sell the home after his death, I will suffer large capital gains taxes on the sale calculated as follows:
Gross proceeds: $816,000Less: basis (my father's purchase price) -$16,000
Taxable proceeds: $800,000
Capital gains taxes: $194,400
(taxes calculated assuming combined State and federal rates of 24.3%)
My sale of the home generates an income tax obligation of $194, 400. This is because when my father gift-transferred the home to me, I am required to use, for income tax purposes, the $16,000 tax basis my father had in the home.
On the other hand, if I inherited the home from my father after his death (i.e. at his death he owned the home in his individual name, or in the name of his living trust, or had other recognizable "incidents of ownership" in the home at his death), I would inherit that home with a new tax basis equal to the value of the property at my father's death (i.e. $816,000!)
This means that when I sell the property after his death and as a result of inheriting it after his death (as opposed to having received it as a gift before his death), there will be no income taxes on the sale proceeds!
It is true that if my father was admitted to a nursing home and needed Medi-Cal services in his declining days, the State would be entitled to have its Medi-Cal expenditures reimbursed from the property which remains in his name at his death (and for that reason some still believe that it is better to transfer the home early). But if the State of California is paying a maximum of approximately $4,500 per month for my father's nursing home Medi-Cal care, it would take, comparatively speaking, 43 months (3½ years) before the State's Medi-Cal estate claim came even close to the $194,400 tax "hit" I suffered above.
Interestingly enough, with the correct estate plan documents in place, there would be a method by which I could transfer my father's home to myself before his death, and this method would both (1) avoid the State's Medi-Cal estate claim and (2) obtain the higher ($816,000) income tax basis in the property which avoids the taxes.
For all of these reasons it would be better for my father to keep ownership of his property, and for us to carefully plan his future use of that property.
The Bottom Line: Rather than making a haphazard gift of the home, an elder adult in the same situation (and even before the first mini stroke or other accident or adverse diagnosis occurs) should contact and consult with a qualified elder law and Medi-Cal planning attorney - to create modifications and adjustments to the elder adult's estate plan - modifications which can authorize the elder adult's child (or other trusted relative) to take actions which both benefit the elder adult and, when necessary, protect the elder adult's home, or the proceeds thereof, and all other assets, from excessive income taxes, gift taxes, Medi-Cal ineligibility, and Medi-Cal estate claims. It can all be done if the correct documents are in place.
Posted by F. Michael Hanson at 12-06-2009 03:10 PM 
Categories: Income Taxes, Estate Planning, Elder Law, The 'Don't Do This!' Bin
Tags: the home income taxes
Categories: Income Taxes, Estate Planning, Elder Law, The 'Don't Do This!' Bin
Tags: the home income taxes
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