If your home is your only asset, your heirs will get to skip probate, but when your children decide to sell the property, they’ll not be able to take advantage of an important income tax saving devise known as a step up in basis. For example,
– Andy adds his adult child, Susan, as a co-owner of his home. When he dies, his home is worth $2,000,000. He purchased the home for $180,000 in 1990 and has not made any major improvements. Susan lives outside the state and decides that she’d like to sell the home.
o When Susan received the gifted interest in the home, she took Andy’s basis. This is called carry-over basis. Since she is owner of 50% of the home, her basis is $90,000 (half of the $180,000 cost basis).
o When Andy dies, Susan will get a step up in basis to the value as of Andy’s date of death for Andy’s portion of the home ($1,000,000).
o Susan’s basis at Andy’s death is $1,090,000 ($1,000,000 + $90,000). If she sells the home for $2,000,000, she will pay capital gains tax on the $910,000 gain.