Often I speak with clients who wish to "gift" their home to their children or clients whose parents want to "transfer" stock, bonds or a home to them. Sometimes this can be a good idea, many times it isn't. Thorough reseach and advice from an attorney or accountant can help determine how beneificial the move will be.
When you buy a house or investments there is always a "cost". That number - the cost - is the basis upon which you will pay taxes down the road when you decide to sell. It is also the number that determines if you have made or lost money. If you have been fortunate to see the value of your investment grow, you will have a profit when you sell it, which adds to your wealth.
Of course, Uncle Sam then steps in for his share of your winnings - capital gains tax. How much tax you pay will be determined by your tax bracket. (Depending on taxable income capital gains tax runs from 10% to 39.6%)
A step-up in basis occurs when you inherit investments or real estate. The cost basis will be the value of the investment on the "date of death" of the owner or nine months later.
Say you or your parents bought a house in 1980 for $250,000. In the present market it's worth $750,000. You die and leave the house to your only child. Your child has the house appraised and sells it for $750,000. How much capital gains tax must your child pay? Zero! The cost basis of the house was "stepped up" to the value on date of death.
If, instead, you decide to "transfer" the house to your child. He is now the owner and then you die. What would the tax consequences be? Assuming he is in the 25% tax bracket, he would owe 15% capital gains tax on $500,000. He would owe $75,000. He received no "step-up in basis" because with a transfer, he assumed your original cost basis of $250,000.
The same thing happens when stocks, bonds and other investments are transferred; there is no step up in cost basis. So if today you inherit 500 shares of IBM grandpa bought in 1950 at $.25 per share ($125) and you sell those shares today you would receive $95,000 free and clear. If grandpa had transferred those shares to you instead of bequeathing them, you would owe taxes on $94,875 ($95,000 - $125) X 15% =$14,231.
Be sure to consult an accountant or an attorney before transferring investments or real estate. You don't want to share with Uncle Sam more than necessary.
Be $ smart!
